Working Paper: NBER ID: w19457
Authors: Roger E.A. Farmer; Vadim Khramov; Giovanni Nicol
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 prove that our method is equivalent to the solution method proposed by Lubik and Schorfheide (2003, 2004), and using the New-Keynesian model described in Lubik and Schorfheide (2004), we demonstrate how to apply our theoretical results with a practical exercise.
Keywords: No keywords provided
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 a subset of non-fundamental errors as new fundamentals (B41) | selecting a unique equilibrium (C62) |
| redefining a subset of non-fundamental errors as new fundamentals (B41) | applying standard solution algorithms (C61) |
| all possible alternative selections of expectational errors (C52) | same likelihood (C12) |
| the authors' method (C90) | estimation and simulation of indeterminate models (C51) |
| the authors' method (C90) | Lubik and Schorfheide's method (C51) |