Monetary Policy Indeterminacy and Identification Failures in the US: Results from a Robust Test

Efrem Castelnuovo and Luca Fanelli ()

No 163, "Marco Fanno" Working Papers from Dipartimento di Scienze Economiche "Marco Fanno"

Abstract: We propose a novel robust test to assess whether an estimated new-Keynesian model is consistent with a unique stable solution, as opposed to multiple equilibria. Our strategy is designed to handle identification failures as well as the misspecification of the relevant propagation mechanisms. We invert a likelihood ratio test for the cross-equation restrictions (CER) that the new-Keynesian system places on its reduced form solution under determinacy. If the CER are not rejected, we rule out the occurrence of sunspot-driven expectations from the model equilibrium and accept the structural model. Otherwise, we move to a second-step and invert, using the same grid considered in the first-step, an Anderson and Rubin-type test for the orthogonality restrictions (OR) implied by the system of Euler equations. We accept the hypothesis of indeterminacy if the OR are not rejected. We investigate the finite sample performance of the suggested two-steps testing strategy by some Monte Carlo experiments. Finally, we apply our robust test to a new-Keynesian AD/AS model estimated with actual U.S. post-WWII data. In spite of some evidence of weak identification as for the `Great Moderation' period, our results offer formal support to the hypothesis of a switch from indeterminacy to uniqueness occurred in the late 1970s.

Keywords: Confidence set; Determinacy; Identification failures; Indeterminacy; Misspecification; New-Keynesian Business Cycle Model; VAR System. (search for similar items in EconPapers)
JEL-codes: C22 C31 E31 E52 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2013-05
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Monetary Policy Indeterminacy and Identification Failures in the U.S.: Results from a Robust Test (2014)
Working Paper: Monetary Policy Indeterminacy and Identification Failures in the U.S.: Results from a Robust Test (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:pad:wpaper:0163

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