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Minimal state variable solutions to Markov-switching rational expectations models

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Author Info

  • Farmer, Roger E.A.
  • Waggoner, Daniel F.
  • Zha, Tao

Abstract

We develop a new method for deriving minimal state variable (MSV) equilibria of a general class of Markov switching rational expectations models and a new algorithm for computing these equilibria. We compare our approach to previously known algorithms, and we demonstrate that ours is both efficient and more reliable than previous methods in the sense that it is able to find MSV equilibria that previously known algorithms cannot. Further, our algorithm can find all possible MSV equilibria in models. This feature is essential if one is interested in using a likelihood based approach to estimation.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 35 (2011)
Issue (Month): 12 ()
Pages: 2150-2166

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:12:p:2150-2166

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Multiple MSV equilibria; Policy changes; Likelihood principle; Quadratic polynomial; E-stability; Iterative algorithm;

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