Testing for Indeterminacy:An Application to U.S. Monetary Policy

Thomas Lubik and Frank Schorfheide

Economics Working Paper Archive from The Johns Hopkins University,Department of Economics

Abstract: This paper considers a prototypical monetary business cycle model for the U.S. economy, in which the equilibrium is undetermined if monetary policy is �inactive? In previous multivariate studies it has been common practice to restrict parameter estimates to values for which the equilibrium is unique. We show how the likelihood-based estimation of dynamic stochastic general equilibrium models can be extended to allow for indeterminacies and sunspot fluctuations. We propose a posterior odds test for the hypothesis that the data are best explained by parameters that imply determinacy. Our empirical results show that the Volcker-Greenspan policy regime is consistent with determinacy, whereas the pre-Volcker regime is not. We find that before 1979 non-fundamental sunspot shocks may have contributed significantly to inflation and interest rate volatility, but essentially did not affect output fluctuations.

Date: 2002-07, Revised 2003-06
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Citations: View citations in EconPapers (9)

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Journal Article: Testing for Indeterminacy: An Application to U.S. Monetary Policy (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:jhu:papers:480

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