Reply to "Generalizing the Taylor Principle: A Comment"

No 14919, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: C62 E31 E52 (search for similar items in EconPapers)
Date: 2009-04
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: EFG
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Published as Troy Davig & Eric M Leeper, 2010. "Generalizing the Taylor Principle: Reply," American Economic Review, vol 100(1), pages 618-624.

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Working Paper: Reply to \"Generalizing the Taylor principle\": a comment (2009)
Working Paper: REPLY TO “GENERALIZING THE TAYLOR PRINCIPLE: A COMMENT” (2009)
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