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Title: Solving and Estimating Indeterminate DSGE Models

Author(s): Roger E A Farmer and Vadim Khramov

Publication Date: September 2013

Keyword(s): Bayesian estimation, Dynare and indeterminacy

Programme Area(s): International Macroeconomics

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 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.

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Bibliographic Reference

Farmer, R and Khramov, V. 2013. 'Solving and Estimating Indeterminate DSGE Models'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9663