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WHAT WE DON'T KNOW ABOUT THE MONETARY TRANSMISSION MECHANISM AND WHY WE DON'T KNOW IT

Published online by Cambridge University Press:  01 April 2008

ANDREAS BEYER  and
ROGER E.A. FARMER
ANDREAS BEYER
Affiliation:
European Central Bank
ROGER E.A. FARMER*
Affiliation:
University of California, Los Angeles
*
Address correspondence to: Roger E.A. Farmer, Department of Economics, University of California, Los Angeles, 8283 Bunche Hall, Box 951477, Los Angeles, CA 90095-1477, USA; e-mail: rfarmer@econ.ucla.edu
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Abstract

We study identification in a class of linear rational expectations models. For any given exactly identified model, we provide an algorithm that generates a class of equivalent models that have the same reduced form. We use our algorithm to show that a model proposed by Jess Benhabib and Roger Farmer is observationally equivalent to the standard new-Keynesian model when observed over a single policy regime. However, the two models have different implications for the design of an optimal policy rule.

Keywords

Rational ExpectationsIdentificationNew-Keynesian ModelBenhabib–Farmer Model
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 12 , Supplement S1: Dynamic Macroeconomic Theory , April 2008 , pp. 60 - 74
Copyright
Copyright © Cambridge University Press 2007

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