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Estimating a Taylor Rule with Markov Switching Regimes for Switzerland

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  • Alexander Perruchoud

Abstract

In this paper a Taylor rule including the exchange rate gap is estimated for Switzerland under the assumption that the parameters depend on two states governed by a Markov switching process. The estimates suggest the presence of an ordinary and an aggressive regime. The former is characterized by a high degree of interest rate smoothing and by significant reactions to inflation and the output gap. The aggressive regime shows much less smoothing, an aggressive reaction to inflation, and a large coefficient on the exchange rate gap. Furthermore, an asymmetry in the occurrence of the two regimes is found.

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Bibliographic Info

Article provided by Swiss Society of Economics and Statistics (SSES) in its journal Swiss Journal of Economics and Statistics.

Volume (Year): 145 (2009)
Issue (Month): II (June)
Pages: 187-220

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Handle: RePEc:ses:arsjes:2009-ii-4

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Related research

Keywords: Taylor rule; Markov switching; Non-constant transition probabilities; Maximum likelihood; EM algorithm;

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