What We Don't Know About the Monetary Transmission Mechanism and Why We Don't Know it

Beyer, Andreas; Farmer, Roger E. A.

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What We Don't Know About the Monetary Transmission Mechanism and Why We Don't Know it

22 Pages Posted: 8 Apr 2005

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: December 2004

Abstract

We study identification in a class of linear rational expectations models. For any given exactly identified model, we provide an algorithm that generates a class of equivalent models that have the same reduced form. We use our algorithm to show that a model proposed by Benhabib and Farmer [1] is observationally equivalent to the standard new-Keynesian model when observed over a single policy regime. However, the two models have different implications for the design of an optimal policy rule.

Keywords: Benhabib-Farmer model, new-Keynesian model, indeterminacy, identification

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

Suggested Citation: Suggested Citation

Beyer, Andreas and Farmer, Roger E.A., What We Don't Know About the Monetary Transmission Mechanism and Why We Don't Know it (December 2004). Available at SSRN: https://ssrn.com/abstract=700643