DP9663 Solving and Estimating Indeterminate DSGE Models
|Author(s):||Roger E A Farmer, Vadim Khramov|
|Publication Date:||September 2013|
|Keyword(s):||Bayesian estimation, Dynare, indeterminacy|
|JEL(s):||C11, C13, C54|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=9663|
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.