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.