How to Estimate Models with Indeterminacy

My coauthors, Vadim Khramov, Giovanni Nicolo and I, have recently completed a revision of our working paper, "Solving and Estimating Indeterminate DSGE Models".

Dynamic Stochastic General Equilibrium Models (DSGE) often have many equilibria. I have long argued that we should exploit that idea to explain real world phenomena. For example, multiple equilibrium models can help to explain why "animal spirits" drive real world markets (see my survey here).

In 2004, Thomas Lubik and Frank Schorfheide published an influential paper which applied that idea to US monetary policy.  A number of authors have taken up their method, but the technique they used is not very easy to apply in practice. Our paper shows how to solve and estimate models with indeterminate equilibria using readily available software packages such as Chris Sim's code Gensys, or the widely used Matlab based package Dynare.