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Perturbation methods for Markov-switching DSGE model

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  • 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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  1. 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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  7. Troy Davig & Eric M. Leeper, 2005. "Generalizing the Taylor principle," Research Working Paper RWP 05-13, Federal Reserve Bank of Kansas City.
  8. Roger E.A. Farmer & Daniel F. Waggoner & Tao Zha, 2009. "Understanding Markov-switching rational expectations models," Working Paper 2009-05, Federal Reserve Bank of Atlanta.
  9. Roger E.A. Farmer & Daniel F. Waggoner & Tao Zha, 2008. "Minimal state variable solutions to Markov-switching rational expectations models," Working Paper 2008-23, Federal Reserve Bank of Atlanta.
  10. Thomas Lubik & Frank Schorfheide, 2002. "Testing for Indeterminacy:An Application to U.S. Monetary Policy," Economics Working Paper Archive 480, The Johns Hopkins University,Department of Economics, revised Jun 2003.
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  15. S. B. Aruoba & Jesús Fernández-Villaverde & Juan F. Rubio-Ramirez, 2005. "Comparing Solution Methods for Dynamic Equilibrium Economies," Levine's Bibliography 122247000000000855, UCLA Department of Economics.
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  18. Ralph S.J. Koijen & Jules H. van Binsbergen & Juan F. Rubio-Ramírez & Jesus Fernandez-Villaverde, 2008. "Likelihood Estimation of DSGE Models with Epstein-Zin Preferences," 2008 Meeting Papers 1099, Society for Economic Dynamics.
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Cited by:
  1. Andrew T. Foerster, 2013. "Monetary policy regime switches and macroeconomic dynamic," Research Working Paper RWP 13-04, Federal Reserve Bank of Kansas City.
  2. 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.

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