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Methods for measuring expectations and uncertainty in Markov-switching models

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  • Bianchi, Francesco

Abstract

I develop methods to analyze multivariate Markov-switching models. Formulas for the evolution of first and second moments are derived and then used to characterize expectations, uncertainty, impulse responses, sources of uncertainty, and welfare implications of regime changes in general equilibrium models. The methods can be used to capture the link between uncertainty and the state of the economy. Campbell’s present value decomposition is generalized to allow for parameter instability. Taking into account regime changes is shown to be important for expectations, welfare, and uncertainty. All results are derived analytically and are therefore suitable for structural estimation.

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  • Bianchi, Francesco, 2016. "Methods for measuring expectations and uncertainty in Markov-switching models," Journal of Econometrics, Elsevier, vol. 190(1), pages 79-99.
    • Handle: RePEc:eee:econom:v:190:y:2016:i:1:p:79-99
    DOI: 10.1016/j.jeconom.2015.08.004
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    Cited by:

    1. Stéphane Lhuissier & Fabien Tripier, 2021. "Regime‐dependent effects of uncertainty shocks: A structural interpretation," Quantitative Economics, Econometric Society, vol. 12(4), pages 1139-1170, November.
    2. Francesco Bianchi & Cosmin Ilut, 2017. "Monetary/Fiscal Policy Mix and Agent's Beliefs," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 113-139, October.
    3. Bianchi, Francesco & Melosi, Leonardo, 2019. "The dire effects of the lack of monetary and fiscal coordination," Journal of Monetary Economics, Elsevier, vol. 104(C), pages 1-22.
    4. Francesco Bianchi & Leonardo Melosi, 2017. "Escaping the Great Recession," American Economic Review, American Economic Association, vol. 107(4), pages 1030-1058, April.
    5. Mutschler, Willi, 2015. "Identification of DSGE models—The effect of higher-order approximation and pruning," Journal of Economic Dynamics and Control, Elsevier, vol. 56(C), pages 34-54.
    6. Castelnuovo, Efrem & Pellegrino, Giovanni, 2018. "Uncertainty-dependent effects of monetary policy shocks: A new-Keynesian interpretation," Journal of Economic Dynamics and Control, Elsevier, vol. 93(C), pages 277-296.
    7. Bianchi, Francesco, 2020. "The Great Depression and the Great Recession: A view from financial markets," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 240-261.
    8. Kole, Erik & van Dijk, Dick, 2023. "Moments, shocks and spillovers in Markov-switching VAR models," Journal of Econometrics, Elsevier, vol. 236(2).
    9. Francesco Bianchi & Howard Kung & Mikhail Tirskikh, 2018. "The Origins and Effects of Macroeconomic Uncertainty," NBER Working Papers 25386, National Bureau of Economic Research, Inc.
    10. Francesco Bianchi & Leonardo Melosi, 2016. "Modeling The Evolution Of Expectations And Uncertainty In General Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57(2), pages 717-756, May.
    11. repec:fip:fedkrw:15-06 is not listed on IDEAS
    12. Marco Airaudo & Ina Hajdini, 2021. "Consistent Expectations Equilibria In Markov Regime Switching Models And Inflation Dynamics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(4), pages 1401-1430, November.
    13. Alexander Karalis Isaac, 2014. "Higher moments of MSVARs and the business cycle," BCAM Working Papers 1405, Birkbeck Centre for Applied Macroeconomics.
    14. Tolga Özden, 2021. "Heterogeneous Expectations and the Business Cycle at the Effective Lower Bound," Working Papers 714, DNB.
    15. Andrew Lee Smith, 2015. "When does the cost channel pose a challenge to inflation targeting central banks?," Research Working Paper RWP 15-6, Federal Reserve Bank of Kansas City.

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    More about this item

    Keywords

    Markov-switching VAR; DSGE; Moments; Expectations; Uncertainty; Impulse responses;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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