On the Solution of Markov-switching Rational Expectations Models
AbstractThis paper describes a method for solving a class of forward-looking Markov-switching Rational Expectations models under noisy measurement, by specifying the unobservable expectations component as a general-measurable function of the observable states of the system, to be determined optimally via stochastic control and filtering theory. Solution existence is proved by setting this function to the regime-dependent feedback control minimizing the mean-square deviation of the equilibrium path from the corresponding perfect-foresight autoregressive Markov jump state motion. As the exact expression of the conditional (rational) expectations term is derived both in finite and infinite horizon model formulations, no (asymptotic) stationarity assumptions are needed to solve forward the system, for only initial values knowledge is required. A simple sufficient condition for the mean-square stability of the obtained rational expectations equilibrium is also provided.
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Bibliographic InfoPaper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse05_2011.
Date of creation: May 2011
Date of revision:
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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
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Rational Expectations; Markov-switching dynamic systems; Dynamic programming; Time-varying Kalman filter;
Find related papers by JEL classification:
- C5 - Mathematical and Quantitative Methods - - Econometric Modeling
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- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-06-04 (All new papers)
- NEP-CBA-2011-06-04 (Central Banking)
- NEP-DGE-2011-06-04 (Dynamic General Equilibrium)
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- NEP-ORE-2011-06-04 (Operations Research)
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