Working Paper: NBER ID: w19360
Authors: David Backus; Mikhail Chernov; Stanley E. Zin
Abstract: Identification problems arise naturally in forward-looking models when agents observe more than economists. We illustrate the problem in several New Keynesian and macro-finance models in which the Taylor rule includes a shock unseen by economists. We show that identification of the rule's parameters requires restrictions on the form of the shock. A state-space treatment verifies that this works when we observe the state of the economy and when we infer it from observable macroeconomic variables or asset prices.
Keywords: Taylor rules; macrofinance; monetary policy; identification problems
JEL Codes: E43; E52; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Observability of the state (C69) | Identification of Taylor rule parameters (E43) |
| Imposing restrictions on the shock (C22) | Identification of Taylor rule parameters (E43) |
| Not observing the shock (D80) | Failure of identification of Taylor rule parameters (C54) |
| Agents observing the shock (L85) | Economists not observing the shock (E39) |
| Systematic response of interest rate to inflation (E43) | Challenges in inferring parameters accurately (C51) |
| Imposing restrictions on the shock (C22) | Identification issue is pervasive in new Keynesian literature (E12) |