Discussion paper

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

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.

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Citation

Farmer, R and A Beyer (eds) (2004), “DP4811 What We Don't Know About the Monetary Transmission Mechanism and Why We Don't Know It”, CEPR Press Discussion Paper No. 4811. https://cepr.org/publications/dp4811