On the Indeterminacy of Determinacy and Indeterminacy
European Central Bank (ECB)
Roger E. A. Farmer
University of California, Los Angeles (UCLA) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
CEPR Discussion Paper No. 4101
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.
Number of Pages in PDF File: 16
Keywords: Identification, indeterminacy
JEL Classification: C30, C62, D51working papers series
Date posted: December 11, 2003
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