Monetary policy indeterminacy in the U.S.: results from a classical test

Castelnuovo, Efrem ; Fanelli, Luca (2011) Monetary policy indeterminacy in the U.S.: results from a classical test. Bologna, IT: Dipartimento di Scienze Statistiche "Paolo Fortunati", Alma Mater Studiorum Università di Bologna, p. 32. DOI 10.6092/unibo/amsacta/3108. In: Quaderni di Dipartimento. Serie Ricerche ISSN 1973-9346.
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We work with a newly developed method to empirically assess whether a specified new-Keynesian business cycle monetary model estimated with U.S. quarterly data is consistent with a unique equilibrium or multiple equilibria under rational expectations. We conduct classical tests to verify if the structural model is correctly specified. Conditional on a positive answer, we formally assess if such model is either consistent with a unique equilibrium or with indeterminacy. Importantly, our full-system approach requires neither the use of prior distributions nor that of nonstandard inference. The case of an indeterminate equilibrium in the pre-1984 sample and of a determinate equilibrium in the post-1984 sample is favored by the data. The long-run coefficients on inflation and the output gap in the monetary policy rule are found to be weakly identified. However, our results are further supported by a proposed identification-robust indicator of indeterminacy.

Document type
Monograph (Working Paper)
Castelnuovo, Efrem
Fanelli, Luca
GMM, Indeterminatezza, Massima Verosimiglianza, Errata specificazione, modello neo-Keynesiano per il ciclo economico, VAR, Identificazione debole GMM, Indeterminacy, Maximum Likelihood, Misspecification, new-Keynesian business cycle model, VAR, Weak identification.
Deposit date
19 Sep 2011 07:46
Last modified
08 Nov 2011 10:02

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