Solving and Estimating Indeterminate DSGE Models

Author/Editor:

Roger Farmer ; Vadim Khramov

Publication Date:

October 1, 2013

Electronic Access:

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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.

Series:

Working Paper No. 13/200

Subject:

English

Publication Date:

October 1, 2013

ISBN/ISSN:

9781475589214/1018-5941

Stock No:

WPIEA2013200

Format:

Paper

Pages:

30

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