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DP4101
On the Indeterminacy of Determinacy and Indeterminacy
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Publication Date:
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October 2003
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Link to this Page:
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www.cepr.org/pubs/dps/DP4101.asp
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A number of authors have attempted to test whether the US economy is in a determinate or an indeterminate equilibrium. We argue that to answer this question, one must impose a priori restrictions on lag length that cannot be tested. We provide examples of two economic models. Model 1 displays an indeterminate equilibrium, driven by sunspots. Model 2 displays a determinate equilibrium driven by fundamentals. Both models have the same likelihood function and are therefore observationally equivalent.
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