Solving and Estimating Indeterminate DSGE Models

50 Pages Posted: 20 Sep 2013 Last revised: 2 Mar 2023

See all articles by Roger E. A. Farmer

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)

Vadim Khramov

International Monetary Fund (IMF); UCLA

Giovanni Nicolò

Board of Governors of the Federal Reserve System

Multiple version iconThere are 3 versions of this paper

Date Written: September 2013

Abstract

We propose a method for solving and estimating linear rational expectations models that exhibit indeterminacy and we provide step-by-step guidelines for implementing this method in the Matlab-based packages Dynare and Gensys. Our method redefines a subset of expectational errors as new fundamentals. This redefinition allows us to treat indeterminate models as determinate and to apply standard solution algorithms. We prove that our method is equivalent to the solution method proposed by Lubik and Schorfheide (2003, 2004), and using the New-Keynesian model described in Lubik and Schorfheide (2004), we demonstrate how to apply our theoretical results with a practical exercise.

Suggested Citation

Farmer, Roger E.A. and Khramov, Vadim and Nicolò, Giovanni, Solving and Estimating Indeterminate DSGE Models (September 2013). NBER Working Paper No. w19457, Available at SSRN: https://ssrn.com/abstract=2328503

Roger E.A. Farmer (Contact Author)

University of Warwick ( email )

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

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Vadim Khramov

International Monetary Fund (IMF) ( email )

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UCLA ( email )

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Giovanni Nicolò

Board of Governors of the Federal Reserve System ( email )

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