Working Paper: CEPR ID: DP4101
Authors: Andreas Beyer; Roger E. A. Farmer
Abstract: A number of authors have attempted to test whether the US economy is in a determinate or an indeterminate equilibrium. We argue that to answer this question, one must impose a priori restrictions on lag length that cannot be tested. We provide examples of two economic models. Model 1 displays an indeterminate equilibrium, driven by sunspots. Model 2 displays a determinate equilibrium driven by fundamentals. Both models have the same likelihood function and are therefore observationally equivalent.
Keywords: Identification; Indeterminacy
JEL Codes: C30; C62; D51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Model Structure (C51) | Equilibrium State (D50) |
| Exogenous Factors (Sunspots) (E32) | Indeterminate Equilibrium (Model 1) (C62) |
| Fundamental Economic Variables (E23) | Determinate Equilibrium (Model 2) (C62) |
| Lag Length Restrictions (C22) | Equilibrium Type Determination (C62) |