TY  - JOUR
AU  - Davig,Troy
AU  - Leeper,Eric M.
TI  - Reply to "Generalizing the Taylor Principle: A Comment"
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14919
PY  - 2009
Y2  - April 2009
UR  - http://www.nber.org/papers/w14919
L1  - http://www.nber.org/papers/w14919.pdf
N1  - Author contact info:
Troy Davig
Research Department
Federal Reserve Bank of Kansas City
Kansas City, MO 64198
E-Mail: troy.davig@kc.frb.org

Eric M. Leeper
Department of Economics
304 Wylie Hall
Indiana University
Bloomington, IN  47405
Tel: 812/855-9157
Fax: NA
E-Mail: eleeper@indiana.edu
AB  - 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.
ER  -