On the indeterminacy of determinacy and indeterminacy

Andreas Beyer () and Roger E. A. Farmer ()

No 277, Working Paper Series from European Central Bank

Abstract: A number of authors have attempted to test whether the U.S. economy is in a determinate or an indeterminate equilibrium. We argue that to answer this question, one must impose a priori restrictions on lag length that cannot be tested. We provide examples of two economic models. Model 1 displays an indeterminate equilibrium, driven by sunspots. Model 2 displays a determinate equilibrium driven by fundamentals. Given assumptions about the shock distribution of model 2, it is possible to find a distribution of sunspot shocks that drive model 1 such that the two models are observationally equivalent. JEL Classification: C39; C62; D51.

Keywords: Identification; indeterminacy. (search for similar items in EconPapers)
Date: 2003-09
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Working Paper: On the Indeterminacy of Determinacy and Indeterminacy (2003)
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