1,720,987 research outputs found
Indeterminacy and fundamental reduced form representations of DSGE Models
No full textDynamic stochastic general equilibrium (DSGE) models are known to exhibit indeterminacy—that is, equilibrium nonuniqueness—under realistic parameterizations. This paper studies how the potential for indeterminacy impacts on the possibility of recovering a DSGE model's structural shocks via empirical vector autoregressions (VARs), which in turn requires the model's reduced form representation to be fundamental. By means of a simple example, we first establish that indeterminacy is neither necessary nor sufficient for (non)fundamental representations to arise. We then investigate the relationship between indeterminacy and nonfundamentalness in the context of a general class of linearized DSGE models, which nests the New Keynesian framework as a special case. It is shown that an indeterminate equilibrium model may generically admit a fundamental moving average representation, even when its determinate counterpart always involves nonfundamentalness. As a main implication, checking for existence of a VAR representation of a DSGE model's equilibria cannot be regarded as an indirect test for the indeterminacy hypothesis
Generalized Adaptive Expectations Revisited
No full textThis paper revisits the generalized adaptive expectations (GAE) mechanism presented by Shepherd (2012) [When are adaptive expectations rational? A generalization, Economics Letters, 115, 4–6]. It provides the precise conditions under which GAE hold, and also discusses its implications for the modeling of expectations in macroeconomic models
Computing Sunspot Solutions to Rational Expectations Models with Timing Restrictions
No full textRational expectations (RE) frameworks featuring informational constraints are becoming increasingly popular in
macroeconomic research. A recent strand of literature has explored the analytics of RE models with informational
subperiods, in which the occurrence of exogenous shocks is period-specific and decision makers thus condition
their own choices and expectations upon a sequence of nested information sets (timing restrictions). Assuming the
unrestricted (full information) RE model satisfies saddle-path stability, this paper provides (i) necessary and
sufficient conditions for existence of an uncountably infinite set of linearly perturbed solutions to its restricted
(informationally constrained) counterpart, and (ii) an algorithm for computing the full set of (sunspot) solutions when
equilibrium indeterminacy occurs
On the Fundamentalness of Nonfundamentalness in DSGE Models
No full textThis note warns against the use of noncausal VARs as a reliable test for indeterminacy. By means of a simple example, we show that determinate models may well entail nonfundamental ARMA equilibrium reduced forms - which only (and uniquely) depend on the fundamental structural shocks -, whereas indeterminate ones may actually be sunspot-free and possess fundamental (i.e. invertible) equilibrium representations. Hence, detecting a causal representation of the data cannot be interpreted as evidence of determinacy
Persistent dynamics in (in)determinate equilibrium rational expectations models
No full textEquilibrium indeterminacy in rational expectations models is often
claimed to produce higher time series persistence relative to determinacy.
Proceeding by means of a simple linear stochastic model, I formally show
that, for reasonable parameter configurations, there exists an uncountable
(continuously infinite) set of indeterminate equilibria in low-order AR(MA)
representation, which exhibit strictly lower persistence than their determinate
counterpart. Implications for empirical studies concerned with, e.g., testing
for indeterminacy and macroeconomic forecasting are discussed
Lobbying (strategically appointed) bureaucrats
No full textWhen are strategic appointments useful in curbing policy bias from ex-post negotiation between state agencies and special interest groups? Bertelli and Feldmann (J Public Adm Res Theory 17:19–38, 2007) provide an insightful analysis of the issue within a full information model of presidential appointments. This paper examines whether and how their findings extend to a world of policy uncertainty and asymmetric information, which rationalizes delegation in the first place. We establish that the occurrence of policy-relevant equilibrium lobbying crucially relies on interest groups’ leverage over the appointment game between higher-level institutions. Remarkably, bureaucratic lobbying may prove highly non-neutral with separated powers even when a candidate agency is agreed upon. In some circumstances (e.g., recess appointments in the US), by contrast, strategic appointments fully offset interest group influence in either form of government (unified versus divided), a finding in line with the conventional theory of delegation
Lobbying-consistent Delegation and Sequential Policy Making
No full textThis paper studies the relationship between interest group political influence and allocation of decisionmaking power in
a potentially divided government. We consider a simple endogenous policy model in which a legislator is in charge of
setting the levels of two different policy instruments - a tax rate and a revenue redistribution scheme - and may decide
to delegate policy authority over the allocation task to a bureaucracy within a hierarchy. An organized group is able to
influence the political process at both tiers through the provision of policy-contingent contributions. We find conditions
under which legislative delegation and sequential decisionmaking are consistent in equilibrium with the presence of
two-tier lobbying, as the effects of the former on the allocation of lobbying activities exactly counterbalance the loss
from bureaucracy's capture. As a consequence, we find that the possibility of multi-tier lobbying within a divided
government need not be harmful to the higher level policy maker in the political equilibrium
On the Production Function for Italy
No full textIn this paper, we assess the ability of the Cobb-Douglas framework to match the empirical evidence for Italy. While the growth accounting approach requires the validity of this functional form and of its parameters, we conduct econometric analysis on a panel of regions for the years 2000-2006 and suggest (i) an alternative specification and (ii) a twofold time series data construction, under which the Cobb-Douglas framework appears to yield the most credible and well-specified formulation of the Italian production function
Model reference adaptive expectations in Markov-switching economies
No full textThis paper offers a theory of model reference adaptive beliefs as a selection device in Markov-switching
economies under equilibrium indeterminacy. Consistent with the classical rational choice paradigm, our
theory requires that endogenous expectations be replaced with a general-measurable function of the observable
states of the model, to be determined optimally. This forecasting function is derived as the
regime-independent feedback control minimizing the mean-square deviation of the equilibrium path
from the corresponding perfect-foresight state motion (the reference model). We show that model reference
adaptive expectations always generate a rational expectations equilibrium, irrespective of the presence
of nonlinearities and/or imperfect information. Under equilibrium indeterminacy, this forecasting
mechanism enforces the unique mean-square stable solution producing nearly perfect-foresight dynamics
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