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Macroeconomic Fluctuations Without Indeterminacy

Joshua Brault (), Hashmat Khan (), Louis Phaneuf () and Jean Gardy Victor ()
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Joshua Brault: Department of Economics, Carleton University,
Hashmat Khan: Department of Economics, Carleton University3,
Louis Phaneuf: Department of Economics, Universite du Quebec a Montreal,

No 21-01, Carleton Economic Papers from Carleton University, Department of Economics

Abstract: We estimate a multi-shock DSGE model with a Bayesian method allowing for determinacy or indeterminacy (Bianchi and Nicoló, 2020). Contrary to conventional wisdom, determinacy is preferred to indeterminacy before and after 1980. The post-1984 contribution of shocks to the marginal efficiency of investment to the cyclical variance of output growth fell dramatically, from 50% to 20%. Greater nominal wage flexibility drove the large decline in output and employment fluctuations after 1984. Inflation variability declined from a hawkish policy stance against inflation and changes in preference parameters. Lower trend inflation and smaller shocks did not play a key role.

Keywords: Conventional Monetary Policy; Determinacy; Bayesian Estimation; Sources of Business Cycle; Changes in Aggregate Volatility (search for similar items in EconPapers)
JEL-codes: E31 E32 E37 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2021-02-19
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-dge, nep-his and nep-mac
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Published: Carleton Economics Papers

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Handle: RePEc:car:carecp:21-01