Timing Transitions between Determinate and Indeterminate Equilibria in an Empirical DSGE Model: Benefits and Implications

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

45 Pages Posted: 27 Apr 2006

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: April 2006

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). This feature is useful because DSGE models generally are estimated with data sets that include the Great Inflation of the 1970s and the surrounding low inflation periods. Timing the transitions between determinate and indeterminate equilibria is one of the key contributions of this paper. Moreover, by letting the data provide estimates of the state transition dates and allowing the estimated structural parameters to be the same across determinacy states, we obtain more precise estimates of the differences in characteristics, such as the impulse responses, across the states. In particular, we find that positive interest rate shocks were inflationary under indeterminacy. While the change-point treatment of indeterminacy is applicable to all estimated linear DSGE models, we demonstrate our methodology by estimating the canonical Woodford model with a time-varying inflation target. Implementation of the change-point methodology coupled with Tailored Metropolis-Hastings provides a highly efficient Bayesian MCMC algorithm. Our prior-posterior updates indicate substantially lower sensitivity to hyperparameters of the prior relative to other estimated DSGE models.

Keywords: DSGE model, Indeterminacy, Great Inflation, State-Space model, change- point, regime switching, Kalman Filter, MCMC, Metropolis-Hastings, Gibbs, Bayes

JEL Classification: E52, E13, C11

Suggested Citation

Belaygorod, Anatoliy and Dueker, Michael, Timing Transitions between Determinate and Indeterminate Equilibria in an Empirical DSGE Model: Benefits and Implications (April 2006). FRB of St. Louis Working Paper No. 2006-025A, Available at SSRN: https://ssrn.com/abstract=897750 or http://dx.doi.org/10.2139/ssrn.897750

Anatoliy Belaygorod (Contact Author)

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

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

411 Locust St
Saint Louis, MO 63011
United States

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