The Price Puzzle and Indeterminacy in an Estimated DSGE Model

FRB of St. Louis Working Paper No. 2006-025B

50 Pages Posted: 8 Mar 2007

See all articles by Anatoliy Belaygorod

Anatoliy Belaygorod

Washington University in St. Louis - John M. Olin Business School

Michael Dueker

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Date Written: March 2007

Abstract

We extend Lubik and Schorfheide's (2004) likelihood-based estimation of dynamic stochastic general equilibrium (DSGE) models under indeterminacy to encompass a sample period including both determinacy and indeterminacy by implementing the change-point methodology (Chib, 1998). The most striking finding about the indeterminacy regime, which is estimated to coincide with the Great Inflation of the 1970s, is that it exhibits the price puzzle, in that the inflation rate rises immediately and in a sustained manner following a positive interest rate shock. Thus, the price puzzle might have been a genuine phenomenon under indeterminacy, rather than a false finding to be excised through specification search and parameter restrictions.

Keywords: Price puzzle, Indeterminacy, Great Inflation, Change-point, Metropolis-Hastings

JEL Classification: E31, E32, E42, E58

Suggested Citation

Belaygorod, Anatoliy and Dueker, Michael, The Price Puzzle and Indeterminacy in an Estimated DSGE Model (March 2007). FRB of St. Louis Working Paper No. 2006-025B, Available at SSRN: https://ssrn.com/abstract=968665 or http://dx.doi.org/10.2139/ssrn.968665

Anatoliy Belaygorod

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Michael Dueker (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

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