On the Indeterminacy of Determinacy and Indeterminacy

Abstract:     
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, D51

working papers series