Working Paper: CEPR ID: DP9663
Authors: Roger E. A. Farmer; Vadim Khramov
Abstract: We propose a method for solving and estimating linear rational expectations models that exhibit indeterminacy and we provide step-by-step guidelines for implementing this method in the Matlab-based packages Dynare and Gensys. Our method redefines a subset of expectational errors as new fundamentals. This redefinition allows us to treat indeterminate models as determinate and to apply standard solution algorithms. We provide a selection method, based on Bayesian model comparison, to decide which errors to pick as fundamental and we present simulation results to show how our procedure works in practice.
Keywords: Bayesian Estimation; Dynare; Indeterminacy
JEL Codes: C11; C13; C54
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| redefining expectational errors (D84) | solving indeterminate DSGE models (E13) |
| nonfundamental errors redefined as fundamentals (Y20) | unique equilibrium selection (C62) |
| redefinition of errors (C52) | application of standard solution algorithms (C61) |
| choice of which nonfundamental errors to redefine (C52) | identification of models (C52) |