Solving and Estimating Indeterminate DSGE Models
NBER Working Paper No. 19457
We propose a method for solving and estimating linear rational expectations models that exhibit indeterminacy and we provide step-by-step guidelines for implementing this method in the Matlab-based packages Dynare and Gensys. Our method redefines a subset of expectational errors as new fundamentals. This redefinition allows us to treat indeterminate models as determinate and to apply standard solution algorithms. We prove that our method is equivalent to the solution method proposed by Lubik and Schorfheide, and using our methodology, we replicate the estimates from their work.
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This paper was revised on September 10, 2014
Document Object Identifier (DOI): 10.3386/w19457
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