Discussion paper

DP4101 On the Indeterminacy of Determinacy and Indeterminacy

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.


Farmer, R and A Beyer (2003), ‘DP4101 On the Indeterminacy of Determinacy and Indeterminacy‘, CEPR Discussion Paper No. 4101. CEPR Press, Paris & London. https://cepr.org/publications/dp4101