Monetary Policy Indeterminacy and Identification Failures in the U.S.: Results from a Robust Test

Efrem Castelnuovo and Luca Fanelli ()

Melbourne Institute Working Paper Series from Melbourne Institute of Applied Economic and Social Research, The University of Melbourne

Abstract: We propose a novel identification-robust test for the null hypothesis that an estimated new- Keynesian model has a reduced form consistent with the unique stable solution against the alternative of sunspot-driven multiple equilibria. Our strategy is designed to handle identification failures as well as the misspecification of the relevant propagation mechanisms. We invert a likelihood ratio test for the cross-equation restrictions (CER) that the new- Keynesian system places on its reduced form solution under determinacy. If the CER are not rejected, sunspot-driven expectations can be ruled out from the model equilibrium and we accept the structural model. Otherwise, we move to a second-step and invert an Anderson and Rubin-type test for the orthogonality restrictions (OR) implied by the system of Euler equations. The hypothesis of indeterminacy and the structural model are accepted if the OR are not rejected. We investigate the finite sample performance of the suggested identificationrobust two-steps testing strategy by some Monte Carlo experiments and then apply it to a new-Keynesian AD/AS model estimated with actual U.S. data. In spite of some evidence of weak identification as for the ‘Great Moderation’ period, our results offer formal support to the hypothesis of a switch from indeterminacy to a scenario consistent with uniqueness which occurred in the late 1970s. Our identification-robust full-information confidence set for the structural parameters computed on the ‘Great Moderation’ regime turns out to be more precise than the intervals previously reported in the literature through ‘limited-information’ methods.

Keywords: Confidence set; determinacy; identification failures; indeterminacy; misspecification; new-Keynesian business cycle model; VAR system (search for similar items in EconPapers)
JEL-codes: C22 C31 E31 E52 (search for similar items in EconPapers)
Pages: 59pp
Date: 2014-07
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Monetary Policy Indeterminacy and Identification Failures in the U.S.: Results from A Robust Test (2015)
Working Paper: Monetary Policy Indeterminacy and Identification Failures in the U.S.: Results from a Robust Test (2014)
Working Paper: Monetary Policy Indeterminacy and Identification Failures in the US: Results from a Robust Test (2013)
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