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Reply to Generalizing the Taylor Principle: A Comment

15 Pages Posted: 12 Jun 2009  

Troy Davig

Federal Reserve Bank of Kansas City

Eric M. Leeper

Indiana University at Bloomington - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: May 19, 2009

Abstract

Farmer, Waggoner, and Zha (2009) show that a new Keynesian model with a regime-switching monetary policy rule can support multiple solutions that depend only on the fundamental shocks in the model. Their note appears to find solutions in regions of the parameter space where there should be no bounded solutions, according to conditions in Davig and Leeper (2007). This puzzling finding is straightforward to explain: Farmer, Waggoner, and Zha (FWZ) derive solutions using a model that differs from the one to which the Davig and Leeper (DL) conditions apply. FWZ's multiple solutions rely on special assumptions about the correlation structure between fundamental shocks and policy regimes, blurring the distinction between "deep" parameters that govern behavior and the parameters that govern the exogenous shock processes, and making it difficult to ascribe any economic interpretation to FWZ's solutions.

JEL Classification: E31, E52, C62

Suggested Citation

Davig, Troy and Leeper, Eric M., Reply to Generalizing the Taylor Principle: A Comment (May 19, 2009). CAEPR Working Paper No. 008-2009. Available at SSRN: https://ssrn.com/abstract=1416904 or http://dx.doi.org/10.2139/ssrn.1416904

Troy Davig (Contact Author)

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States

Eric Michael Leeper

Indiana University at Bloomington - Department of Economics ( email )

304 Wylie Hall
Bloomington, IN 47405-6620
United States
812-855-9157 (Phone)
812-855-3736 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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