Reply to "Generalizing the Taylor Principle: A Comment" / Troy Davig, Eric M. Leeper.

Format:

Book

Author/Creator:

Davig, Troy.

Contributor:

National Bureau of Economic Research.

Leeper, Eric M.

Series:

Working Paper Series (National Bureau of Economic Research) no. w14919.

NBER working paper series no. w14919

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Reply to "Generalizing the Taylor Principle

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2009.

Summary:

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.

Notes:

Print version record

April 2009.