Estimating a small open economy DSGE model with indeterminacy: Evidence from China

► Derive the boundary of determinacy in a small open economy DSGE model. ► Find that the macroeconomic system in China is under indeterminacy. ► Indeterminacy stems from sunspot shock and propagation of fundamental shocks. ► The PBC includes the RMB exchange rate in its monetary policy rule. ► Monetary policy shock affects real economy in the short run, not in the long run.