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Learning About Regime Change

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  • Andrew Foerster
  • Christian Matthes

Abstract

Total factor productivity (TFP) and investment specific technology (IST) growth both exhibit regime‐switching behavior, but the regime at any given time is difficult to infer. We build a rational expectations real business cycle model where the underlying TFP and IST regimes are unobserved. We develop a general perturbation solution algorithm for a wide class of models with unobserved regime‐switching. Using our method, we show learning about regime‐switching fits the data, affect the responses to regime shifts and intraregime shocks, increase asymmetries in the responses, generate forecast error bias even with rational agents, and raise the welfare cost of fluctuations.

Suggested Citation

  • Andrew Foerster & Christian Matthes, 2022. "Learning About Regime Change," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(4), pages 1829-1859, November.
    • Handle: RePEc:wly:iecrev:v:63:y:2022:i:4:p:1829-1859
    DOI: 10.1111/iere.12585
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    Cited by:

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    2. Antonio Pacifico, 2021. "Structural Panel Bayesian VAR with Multivariate Time-Varying Volatility to Jointly Deal with Structural Changes, Policy Regime Shifts, and Endogeneity Issues," Econometrics, MDPI, vol. 9(2), pages 1-35, May.
    3. John G. Fernald & Huiyu Li, 2021. "The Impact of COVID on Potential Output," Working Paper Series 2021-09, Federal Reserve Bank of San Francisco.
    4. Janice C. dup Eberly & John dup Fernald, 2022. "Jackson Hole 2022 - Reassessing Economic Constraints: Potential Output (The Impact of COVID on Productivity and Potential Output)," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, August.

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    More about this item

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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