On the Indeterminacy of New-Keynesian Economics

51 Pages Posted: 16 May 2004

See all articles by Andreas Beyer

Andreas Beyer

European Central Bank (ECB)

Roger E. A. Farmer

University of Warwick; University of California, Los Angeles (UCLA) - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); National Institute of Economic and Social Research (NIESR)

Date Written: March 2004

Abstract

We study identification in a class of three-equation monetary models. We argue that these models are typically not identified. For any given exactly identified model, we provide an algorithm that generates a class of equivalent models that have the same reduced form. In our first two examples we show that it is not possible to tell whether the policy rule or the Phillips curve is forward or backward looking. In example 3 we establish an equivalence between a class of models proposed by Benhabib and Farmer [1] and the standard new-Keynesian model. This result is disturbing since equilibria in the Benhabib-Farmer model are typically indeterminate for a class of policy rules that generate determinate outcomes in the new-Keynesian model. In example 4, we show that there is an equivalence between determinate and indeterminate models even if one knows the structural equations of the model.

Keywords: Identification, indeterminacy, transparency, new-Keynesian model

JEL Classification: C39, C62, D51, E52, E58

Suggested Citation

Beyer, Andreas and Farmer, Roger E.A., On the Indeterminacy of New-Keynesian Economics (March 2004). Available at SSRN: https://ssrn.com/abstract=526986 or http://dx.doi.org/10.2139/ssrn.526986

Andreas Beyer (Contact Author)

European Central Bank (ECB) ( email )

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Roger E.A. Farmer

University of Warwick ( email )

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University of California, Los Angeles (UCLA) - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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National Institute of Economic and Social Research (NIESR) ( email )

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