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Understanding Markov-switching rational expectations models

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

Abstract

We develop a set of necessary and sufficient conditions for equilibria to be determinate in a class of forward-looking Markov-switching rational expectations models and we develop an algorithm to check these conditions in practice. We use three examples, based on the new-Keynesian model of monetary policy, to illustrate our technique. Our work connects applied econometric models of Markov-switching with forward looking rational expectations models and allows an applied researcher to construct the likelihood function for models in this class over a parameter space that includes a determinate region and an indeterminate region.

Suggested Citation

  • Farmer, Roger E.A. & Waggoner, Daniel F. & Zha, Tao, 2009. "Understanding Markov-switching rational expectations models," Journal of Economic Theory, Elsevier, vol. 144(5), pages 1849-1867, September.
    • Handle: RePEc:eee:jetheo:v:144:y:2009:i:5:p:1849-1867
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    References listed on IDEAS

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    More about this item

    Keywords

    Stability Non-linearity Unique equilibrium Cross-regime indeterminacy Expectations formation Necessary and sufficient conditions;

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • E0 - Macroeconomics and Monetary Economics - - General
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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