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Indeterminacy in a forward-looking regime-switching model

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  • Roger E.A. Farmer
  • Daniel F. Waggoner
  • Tao Zha

Abstract

This paper is about the properties of Markov-switching rational expectations (MSRE) models. We discuss possible solution concepts for MSRE models, distinguishing between stationary and bounded equilibria. For the case of models with one variable, we provide a necessary and sufficient condition for uniqueness of a bounded equilibrium, and we relate this condition to an alternative, the generalized Taylor principle suggested by Davig and Leeper. We provide examples of models with multiple bounded and multiple stationary equilibria which suggest that it may be more difficult to rule out nonfundamental equilibria in MSRE models than in the single-regime case where the Taylor principle is known to guarantee local uniqueness.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2006-19.

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Date of creation: 2007
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Handle: RePEc:fip:fedawp:2006-19

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  1. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  2. Robert G. King, 2000. "The new IS-LM model : language, logic, and limits," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 45-103.
  3. Farmer, Roger E.A. & Waggoner, Daniel F. & Zha, Tao, 2011. "Minimal state variable solutions to Markov-switching rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 35(12), pages 2150-2166.
  4. Svensson, Lars E. O. & Williams, Noah, 2005. "Monetary policy with model uncertainty: distribution forecast targeting," Discussion Paper Series 1: Economic Studies 2005,35, Deutsche Bundesbank, Research Centre.
  5. Troy Davig & Eric M. Leeper, 2006. "Generalizing the Taylor Principle," Caepr Working Papers 2006-001, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  6. Julio J. Rotemberg & Michael Woodford, 1998. "Interest-Rate Rules in an Estimated Sticky Price Model," NBER Working Papers 6618, National Bureau of Economic Research, Inc.
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