Indeterminate Equilibria in New Keynesian DSGE Model: An Application to the US Great Moderation

Deniz M Erdemlioglu and Wei Xiao

MPRA Paper from University Library of Munich, Germany

Abstract: This paper tests “Bad Policy” Hypothesis which refers to the Great Moderation in the US. We examine this hypothesis by simulating model based impulse response functions for the both pre-Volcker period and post 1982 period. Deriving and simulating standard New Keynesian DSGE Model explicitly, we find that while post 1982 policy i.e. active policy, is consistent with the unique stable equilibrium characteristics; pre-Volcker or passive monetary policy generates equilibrium indeterminacy. Moreover, our simulated-impulse response functions show that the response of inflation and the output gap in post 82 period is weaker than the macroeconomic responses of the pre-Volcker period.

Keywords: The Great Moderation; Indeterminacy; Determinate Equilibrium; New Keynesian DSGE Model; Monetary Policy; Sunspot shocks (search for similar items in EconPapers)
JEL-codes: E0 E32 E52 (search for similar items in EconPapers)
Date: 2008-05-15
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:10322

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