DP4811 What We Don't Know About the Monetary Transmission Mechanism and Why We Don't Know It

Author(s): Andreas Beyer, Roger E A Farmer
Publication Date: December 2004
Keyword(s): Benhabib-Farmer model, Identification, indeterminacy, new-Keynesian model
JEL(s): C39, C62, D51, E52, E58
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4811

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.