A Biased Expectation Equilibrium in Indeterminate DSGE Models

The aim of this article is to introduce a solution method for an indeterminate dynamic stochastic general equilibrium (DSGE) model. The method uses the concept of a biased expectation equilibrium, which is defined in this paper and means that expectations of certain variable are mechanically biased against those that would be rational. Our method should be particularly useful in terms of empirical estimation using DSGE models, because it will allow researchers to estimate how much agents’ expectations are biased in the case where a model has indeterminacy.