DP4101 On the Indeterminacy of Determinacy and Indeterminacy
| Author(s): | Andreas Beyer, Roger E A Farmer |
| Publication Date: | October 2003 |
| Keyword(s): | identification, indeterminacy |
| JEL(s): | C62, D51 |
| Programme Areas: | International Macroeconomics |
| Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=4101 |
A number of authors have attempted to test whether the US economy is in a determinate or an indeterminate equilibrium. We argue that to answer this question, one must impose a priori restrictions on lag length that cannot be tested. We provide examples of two economic models. Model 1 displays an indeterminate equilibrium, driven by sunspots. Model 2 displays a determinate equilibrium driven by fundamentals. Both models have the same likelihood function and are therefore observationally equivalent.