Solving and Estimating Indeterminate DSGE Models

October 1, 2013

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Format: Chicago

Roger Farmer, and Vadim Khramov. Solving and Estimating Indeterminate DSGE Models, (USA: International Monetary Fund, 2013) accessed September 20, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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 provide a selection method, based on Bayesian model comparison, to decide which errors to pick as fundamental and we present simulation results to show how our procedure works in practice.

Subject: Estimation techniques, Labor, Neoclassical theory, Rational expectations

Keywords: WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/200
Stock No:

WPIEA2013200
ISBN:

9781475589214
ISSN:

1018-5941

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