Indeterminacy and fundamental reduced form representations of DSGE models

Marco Sorge

Metroeconomica, 2018, vol. 69, issue 2, 509-524

Abstract: Dynamic stochastic general equilibrium (DSGE) models are known to exhibit indeterminacy—that is, equilibrium nonuniqueness—under realistic parameterizations. This paper studies how the potential for indeterminacy impacts on the possibility of recovering a DSGE model's structural shocks via empirical vector autoregressions (VARs), which in turn requires the model's reduced form representation to be fundamental. By means of a simple example, we first establish that indeterminacy is neither necessary nor sufficient for (non)fundamental representations to arise. We then investigate the relationship between indeterminacy and nonfundamentalness in the context of a general class of linearized DSGE models, which nests the New Keynesian framework as a special case. It is shown that an indeterminate equilibrium model may generically admit a fundamental moving average representation, even when its determinate counterpart always involves nonfundamentalness. As a main implication, checking for existence of a VAR representation of a DSGE model's equilibria cannot be regarded as an indirect test for the indeterminacy hypothesis.

Date: 2018
References: Add references at CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1111/meca.12198

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:metroe:v:69:y:2018:i:2:p:509-524

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0026-1386

Access Statistics for this article

Metroeconomica is currently edited by Heinz D. Kurz and Neri Salvadori

More articles in Metroeconomica from Wiley Blackwell
Bibliographic data for series maintained by Wiley Content Delivery ().