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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 considers 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 might be more difficult to rule out non‐fundamental equilibria in MSRE models than in the single regime case where the Taylor principle is known to guarantee local uniqueness.

Suggested Citation

  • Roger E. A. Farmer & Daniel F. Waggoner & Tao Zha, 2009. "Indeterminacy in a forward‐looking regime switching model," International Journal of Economic Theory, The International Society for Economic Theory, vol. 5(1), pages 69-84, March.
  • Handle: RePEc:bla:ijethy:v:5:y:2009:i:1:p:69-84
    DOI: 10.1111/j.1742-7363.2008.00094.x
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    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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