Solving and Estimating Indeterminate DSGE Models
50 Pages Posted: 20 Sep 2013 Last revised: 2 Mar 2023
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Solving and Estimating Indeterminate DSGE Models
Solving and Estimating Indeterminate DSGE Models
Solving and Estimating Indeterminate DSGE Models
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.
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