Estimating a small open economy DSGE model with indeterminacy: Evidence from China

Tingguo Zheng and Huiming Guo

Economic Modelling, 2013, vol. 31, issue C, 642-652

Abstract: Considering that monetary policy instability may cause indeterminacy of the macroeconomic equilibrium, this paper derives the boundary condition between determinacy and indeterminacy in a small open economy DSGE model, and then uses this model to investigate China's monetary policy and macroeconomic fluctuations under indeterminacy during the period from 1992 to 2011. The empirical results show that the nominal interest rate reacts not only to inflation and output gap, but also to the changes in RMB exchange rate. Moreover, the indeterminacy in the macro-dynamics indicates the instability in China's monetary policy, and it stems from two sources, the sunspot shock and the indeterminate propagation of fundamental shocks. In addition, we find that the monetary policy shock affects macroeconomic dynamics significantly in the short run, while in the long run, it only influences nominal variables, such as the inflation and the exchange rate, but not the real output.

Keywords: Small open economy; DSGE model; Indeterminacy; Monetary policy (search for similar items in EconPapers)
JEL-codes: C5 E4 E5 F4 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:31:y:2013:i:c:p:642-652

DOI: 10.1016/j.econmod.2013.01.002

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