Discussion paper

DP9663 Solving and Estimating Indeterminate DSGE Models

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.

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Citation

Farmer, R (2013), ‘DP9663 Solving and Estimating Indeterminate DSGE Models‘, CEPR Discussion Paper No. 9663. CEPR Press, Paris & London. https://cepr.org/publications/dp9663