English, Article, Journal or magazine article edition: Reply to "Generalizing the Taylor principle": a comment Eric M. Leeper; Troy Davig

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Bookmark: http://trove.nla.gov.au/version/6932
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Reply to "Generalizing the Taylor principle": a comment
Author
  • Eric M. Leeper
  • Troy Davig
Physical Description
  • preprint
Notes
  • 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.
  • RePEc:nbr:nberwo:14919
  • 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. In addition, FWZ impose cross-equation restrictions between behavioral relations and the exogenous driving process. This rather special assumption undermines the traditional sharp distinction in micro-founded general equilibrium models between 'deep' parameters and the parameters governing the exogenous processes.
  • RePEc:fip:fedkrw:rwp09-09
Language
  • English
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