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Perturbation methods for Markov-switching DSGE model

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Author Info

  • Andrew Foerster
  • Juan Rubio-Ramirez
  • Dan Waggoner
  • Tao Zha

Abstract

The macroeconomic environment often changes repeatedly over time, and often in a recurring manner. For example, the economy may switch between periods of high and low growth, or monetary policy may switch between periods of strong versus weak responses to inflation. An important question for economists is how to model the presence of these switches, and to capture how expectations about switches in the future may impact economic behavior. ; This paper develops a methodology for solving dynamic stochastic general equilibrium (DSGE) models in the presence of switching environments. The approach allows for features of the economy to change over time, and for consumers, firms, or policymakers to internalize the expectations of future changes on their behavior. ; the procedure. In one example, the economy switches between a high and low growth periods. In the second example, the monetary authority changes how strongly it responds to deviations of inflation from its inflation target. Both examples highlight that expectations of future changes impact behavior in important ways.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 13-01.

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Date of creation: 2013
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Handle: RePEc:fip:fedkrw:rwp13-01

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References

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  10. Christopher A. Sims & Tao Zha, 2006. "Were There Regime Switches in U.S. Monetary Policy?," American Economic Review, American Economic Association, vol. 96(1), pages 54-81, March.
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Cited by:
  1. Blagov , Boris & Funke, Michael, 2013. "The regime-dependent evolution of credibility: A fresh look at Hong Kong’s linked exchange rate system," BOFIT Discussion Papers 24/2013, Bank of Finland, Institute for Economies in Transition.
  2. Andrew Foerster, 2013. "Monetary Policy Regime Switches and Macroeconomic Dynamics," 2013 Meeting Papers 906, Society for Economic Dynamics.

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