Hostname: page-component-586b7cd67f-g8jcs Total loading time: 0 Render date: 2024-11-22T21:16:10.407Z Has data issue: false hasContentIssue false
  • English
  • Français

WHAT WE DON'T KNOW ABOUT THE MONETARY TRANSMISSION MECHANISM AND WHY WE DON'T KNOW IT

Published online by Cambridge University Press:  01 April 2008

ANDREAS BEYER  and
ROGER E.A. FARMER
ANDREAS BEYER
Affiliation:
European Central Bank
ROGER E.A. FARMER*
Affiliation:
University of California, Los Angeles
*
Address correspondence to: Roger E.A. Farmer, Department of Economics, University of California, Los Angeles, 8283 Bunche Hall, Box 951477, Los Angeles, CA 90095-1477, USA; e-mail: [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

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 Jess Benhabib and Roger Farmer 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.

Keywords

Rational ExpectationsIdentificationNew-Keynesian ModelBenhabib–Farmer Model
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 12 , Supplement S1: Dynamic Macroeconomic Theory , April 2008 , pp. 60 - 74
Copyright
Copyright © Cambridge University Press 2007

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Benhabib, Jess and Farmer, Roger E.A. 2000 The monetary transmission mechanism. Review of Economic Dynamics 3, 523– 550.CrossRefGoogle Scholar
Beyer, Andreas and Farmer, Roger E.A. 2004a On the Indeterminacy of new-Keynesian Economics. European Central Bank working paper 323.CrossRefGoogle Scholar
Beyer, Andreas and Farmer, Roger E.A. 2004b Measuring the Effects of Real and Monetary Shocks in a Structural new-Keynesian Model. Mimeo, UCLA.Google Scholar
Beyer, Andreas, Farmer, Roger E.A., Henry, Jérôme, and Marcellino, Massimiliano 2005 Factor Analysis in a New Keynesian Model. European Central Bank working paper 510.CrossRefGoogle Scholar
Canova, Fabio and Sala, Luca 2005 Back to Square One: Identification Issues in DSGE Models. Mimeo, Universitá Bocconi.Google Scholar
Clarida, R., Galí, J., and Gertler, M. 2000 Monetary policy rules and macroeconomic stability: Evidence and some theory. Quarterly Journal of Economics 115 (1), 147– 180.CrossRefGoogle Scholar
Clarida, R., Galí, J., and Gertler, M. 2002 A simple framework for international monetary policy analysis. Journal of Monetary Economics 49 (5), 879– 904.CrossRefGoogle Scholar
Fisher, F. 1966 The Identification Problem in Econometrics. New York: McGraw-Hill.Google Scholar
Fuhrer, Jeffrey C. and Rudebusch, Glenn D. 2004 Estimating the euler equation for output. Journal of Monetary Economics 51 (6), 1133– 1153.CrossRefGoogle Scholar
Galí, Jordi and Gertler, Mark 1999 Inflation dynamics: A structural econometric analysis. Journal of Monetary Economics 44, 195– 222.CrossRefGoogle Scholar
Hsiao, Cheng 1983 Identification. In Griliches, Z. and Intrilligator, M. (Eds.), Handbook of Econometrics, I, 224– 283. Amsterdam: North-Holland.Google Scholar
Ireland, Peter 2004 Money's role in the monetary business cycle. Journal of Money, Credit, and Banking 36 (6), 969– 983.CrossRefGoogle Scholar
Koopmans, T.C. and Marschak, J. (eds.) 1950 Statistical Inference in Dynamic Economic Models, Cowles Commission for Research in Economics, Monograph 10. New York: Wiley.Google Scholar
Lindé, Jesper 2001 The Empirical Relevance of Simple Forward- and Backward-looking Models: A View from a Dynamic General Equilibrium Model. Sveriges Riksbank (Central Bank of Sweden) working paper 130.Google Scholar
Líndé, Jesper 2005 Estimating new-Keynesian Phillips Curves: A Full Information Maximum Likelihood Approach. Sveriges Riksbank (Central Bank of Sweden) working paper 129.CrossRefGoogle Scholar
Liu, T. 1960. Underidentification, structural estimation, and forecasting. Econometrica 28 (4), 855– 865.CrossRefGoogle Scholar
Lubik, Thomas A. and Schorfheide, Frank 2003 Computing sunspot equilibria in linear rational expectations model. Journal of Economic Dynamics and Control, 28 (2)273– 285.CrossRefGoogle Scholar
Lubik, Thomas A. and Schorfheide, Frank 2004. Testing for indeterminacy: An application to U.S. monetary policy. American Economic Review 94 (1)190– 217.CrossRefGoogle Scholar
Mavroeidis, Sophocles 2002 Identification and Mis-Specification Issues in Forward Looking Models. Department of Quantitative Economics, University of Amsterdam discussion paper 2002/21.Google Scholar
McCallum, Bennett 1976 Rational expectations and the estimation of econometric models: An alternative procedure. International Economic Review 17 (2), 484– 490.CrossRefGoogle Scholar
Nason, James M. and Smith, Gregor W. 2003 Identifying the New Keynesian Phillips Curve. Mimeo, Federal Reserve Bank of Atlanta.Google Scholar
Pesaran, Hashem 1987. The Limits to Rational Expectations. Basil Blackwell, Oxford.Google Scholar
Rotemberg, J.J. and Woodford, M. 1998 An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy: Expanded Version. NBER technical working paper 233.CrossRefGoogle Scholar
Rothenberg, T. 1971 Identification in parametric models. Econometrica 39, 577– 591.CrossRefGoogle Scholar
Sargent, Thomas 1976 The observational equivalence of natural and unnatural rate theories of macroeconomics. Journal of Political Economy 84 (3), 631– 640.CrossRefGoogle Scholar
Sims, Christopher A. 1980 Macroeconomics and reality. Econometrica 48 (1), 1– 48.CrossRefGoogle Scholar
Sims, Christopher A. 2002 Solving linear rational expectations models. Computational Economics, 20 (1–2), 1– 20.CrossRefGoogle Scholar
Woodford, Michael 2003 Interest and Prices. Princeton: Princeton University Press.Google Scholar