Essays on Bayesian estimation of DSGE models with indeterminacy

Abstract

This thesis comprises three self-contained papers on the Bayesian estimation of DSGE models with indeterminacy. The first paper estimates a small open economy model of Australia with positive trend inflation while allowing for equilibrium indeterminacy. It shows that positive trend inflation can shrink the determinacy region especially when trend inflation rate or price stickiness is high. The estimation is conducted from 1983:I to 1993:I covering the pre-inflation-targeting regime and from 1993:II to 2007:III covering the inflation-targeting regime. It finds that Australian monetary policy before inflation targeting period made the economy more prone to multiple equilibria, whereas the inflation targeting policy pushed the economy towards stability. The second paper estimates an artificial economy with financial market fric- tions. It shows that animal spirits are prime drivers of U.S. business cycle fluctuations. Animal spirits shocks account for well over a third of output fluc- tuations over the period from 1955 to 2014. Financial friction and technology shocks are considerably less significant in explaining the oscillations in aggre- gate real economic activity. It also finds that a substantial part of aggregate output's contraction during the Great Recession was caused by adverse shocks to expectations. The third paper provides a quantitative assessment of an efficiency-wage model in which equilibrium can be indeterminate even without externalities or increasing returns. Indeterminacy in this model is linked to the degree of risk sharing between employed and unemployed workers. The theoretical model is estimated on U.S. data via full information Bayesian methods. The analysis shows that the shirking model is capable of matching the stylized facts of the labor market. However, the data strongly favor a version of the artificial economy that is characterized by determinacy.