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Minimal state variable solutions to Markov-switching rational expectations models

Author

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

Abstract

We develop a new method for deriving minimal state variable (MSV) equilibria of a general class of Markov switching rational expectations models and a new algorithm for computing these equilibria. We compare our approach to previously known algorithms, and we demonstrate that ours is both efficient and more reliable than previous methods in the sense that it is able to find MSV equilibria that previously known algorithms cannot. Further, our algorithm can find all possible MSV equilibria in models. This feature is essential if one is interested in using a likelihood based approach to estimation.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:dyncon:v:35:y:2011:i:12:p:2150-2166
    DOI: 10.1016/j.jedc.2011.08.005
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    More about this item

    Keywords

    Multiple MSV equilibria; Policy changes; Likelihood principle; Quadratic polynomial; E-stability; Iterative algorithm;
    All these keywords.

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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