Working Paper: CEPR ID: DP4811
Authors: Andreas Beyer; Roger E. A. Farmer
Abstract: We study identification in a class of linear rational expectations models. For any given exactly identified model, we provide an algorithm that generates a class of equivalent models that have the same reduced form. We use our algorithm to show that a model proposed by Benhabib and Farmer [1] is observationally equivalent to the standard new-Keynesian model when observed over a single policy regime. However, the two models have different implications for the design of an optimal policy rule.
Keywords: Benhabib-Farmer Model; Identification; Indeterminacy; New-Keynesian Model
JEL Codes: C39; C62; D51; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| identification assumptions in the New-Keynesian model (E12) | conclusions drawn from such models (C20) |
| Benhabib and Farmer model is observationally equivalent to the standard New-Keynesian model (E19) | optimal policy design implications (H21) |
| different determinacy properties between models (C52) | econometricians cannot determine policy regime outcomes (D78) |
| Benhabib-Farmer model can be indeterminate (C62) | New-Keynesian model can be determinate under certain policy rules (C54) |