NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Identifying Taylor Rules in Macro-Finance Models

David Backus, Mikhail Chernov, Stanley E. Zin

NBER Working Paper No. 19360
Issued in August 2013
NBER Program(s):   AP   EFG

Identification problems arise naturally in forward-looking models when agents observe more than economists. We illustrate the problem in several New Keynesian and macro-finance models in which the Taylor rule includes a shock unseen by economists. We show that identification of the rule's parameters requires restrictions on the form of the shock. A state-space treatment verifies that this works when we observe the state of the economy and when we infer it from observable macroeconomic variables or asset prices.

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This paper was revised on April 10, 2015

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Document Object Identifier (DOI): 10.3386/w19360

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