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Title: What We Don't Know About the Monetary Transmission Mechanism and Why We Don't Know It

Author(s): Andreas Beyer and Roger E A Farmer

Publication Date: December 2004

Keyword(s): Benhabib-Farmer model, Identification, indeterminacy and new-Keynesian model

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Beyer, A and Farmer, R. 2004. 'What We Don't Know About the Monetary Transmission Mechanism and Why We Don't Know It'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4811