State-Dependent Probability Distributions in Non Linear Rational Expectations Models
AbstractIn this paper, we provide solution methods for non-linear rational expectations models in which regime-switching or the shocks themselves may be "endogenous", i.e. follow state-dependent probability distributions. We use the perturbation approach to find determinacy conditions, i.e. conditions for the existence of a unique stable equilibrium. We show that these conditions directly follow from the corresponding conditions in the exogenous regime-switching model. Whereas these conditions are difficult to check in the general case, we provide for easily verifiable and sufficient determinacy conditions and first-order approximation of the solution for purely forward-looking models. Finally, we illustrate our results with a Fisherian model of inflation determination in which the monetary policy rule may change across regimes according to a state-dependent transition probability matrix.
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Bibliographic InfoPaper provided by Banque de France in its series Working papers with number 347.
Length: 30 pages
Date of creation: 2011
Date of revision:
Perturbation methods; monetary policy; indeterminacy; regime switching; DSGE.;
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-07 (All new papers)
- NEP-CBA-2011-11-07 (Central Banking)
- NEP-DGE-2011-11-07 (Dynamic General Equilibrium)
- NEP-MAC-2011-11-07 (Macroeconomics)
- NEP-MON-2011-11-07 (Monetary Economics)
- NEP-ORE-2011-11-07 (Operations Research)
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