Reply to \"Generalizing the Taylor principle\": a comment

Troy Davig and Eric Leeper

No RWP 09-09, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: Farmer, Waggoner, and Zha (2009) show that a new Keynesian model with a regime-switching monetary policy rule can support multiple solutions that depend only on the fundamental shocks in the model. Their note appears to find solutions in regions of the parameter space where there should be no bounded solutions, according to conditions in Davig and Leeper (2007). This puzzling finding is straightforward to explain: Farmer, Waggoner, and Zha (FWZ) derive solutions using a model that differs from the one to which the Davig and Leeper (DL) conditions apply. In addition, FWZ impose cross-equation restrictions between behavioral relations and the exogenous driving process. This rather special assumption undermines the traditional sharp distinction in micro-founded general equilibrium models between 'deep' parameters and the parameters governing the exogenous processes.

Date: 2009
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Related works:
Working Paper: REPLY TO “GENERALIZING THE TAYLOR PRINCIPLE: A COMMENT” (2009)
Working Paper: Reply to "Generalizing the Taylor Principle: A Comment" (2009)
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