A Generalized Approach to Indeterminacy in Linear Rational Expectations Models

Francesco Bianchi and Giovanni Nicolò

No 23521, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose a novel approach to deal with the problem of indeterminacy in Linear Rational Expectations models. The method consists of augmenting the original model with a set of auxiliary exogenous equations that are used to provide the adequate number of explosive roots in presence of indeterminacy. The solution in this expanded state space, if it exists, is always determinate, and is identical to the indeterminate solution of the original model. The proposed approach accommodates determinacy and any degree of indeterminacy, and it can be implemented even when the boundaries of the determinacy region are unknown. As a result, the researcher can estimate the model by using standard packages without restricting the estimates to a certain area of the parameter space. We apply our method to simulated and actual data from a prototypical New-Keynesian model for both regions of the parameter space. We show that our method successfully recovers the true parameter values independent of the initial values.

JEL-codes: C19 C51 C62 C63 (search for similar items in EconPapers)
Date: 2017-06
New Economics Papers: this item is included in nep-dge, nep-ecm and nep-ore
Note: EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

Published as Francesco Bianchi & Giovanni Nicolò, 2021. "A generalized approach to indeterminacy in linear rational expectations models," Quantitative Economics, Econometric Society, vol. 12(3), pages 843-868, July.

Downloads: (external link)
http://www.nber.org/papers/w23521.pdf (application/pdf)

Related works:
Working Paper: A Generalized Approach to Indeterminacy in Linear Rational Expectations Models (2019)
Working Paper: A Generalized Approach to Indeterminacy in Linear Rational Expectations Models (2017)
Working Paper: A Generalized Approach to Indeterminacy in Linear Rational Expectations Models (2016)
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:nbr:nberwo:23521

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w23521

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().