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.