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Sufficient Conditions for Determinacy in a Class of Markov-Switching Rational Expectations Models

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  • Seonghoon Cho

    (Yonsei University)

Abstract

Markov-switching rational expectations (MSRE) models can bring out fresh insights beyond what linear rational expectations models have done for macroeconomics, as noted and predicted by Davig and Leeper (2007) and Farmer, Waggoner and Zha (2009), among others. However, a lack of tractable methodological foundations may have hindered researchers from uncovering the salient features of MSRE models. This study proposes a solution method and derives very tractable sufficient conditions for determinacy and indeterminacy in the mean-square stability sense in general MSRE models with lagged endogenous variables. These tasks are accomplished by extending the forward method of Cho and Moreno (2011) developed for linear rational expectations models to MSRE. We apply our methodology to a New-Keynesian model subject to regime-switching in monetary policy and find some unforeseen but intuitive determinacy results. (Copyright: Elsevier)

Suggested Citation

  • Seonghoon Cho, 2016. "Sufficient Conditions for Determinacy in a Class of Markov-Switching Rational Expectations Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 21, pages 182-200, July.
  • Handle: RePEc:red:issued:14-34
    DOI: 10.1016/j.red.2015.03.001
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    References listed on IDEAS

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    Cited by:

    1. Francesco Bianchi & Cosmin Ilut, 2017. "Monetary/Fiscal Policy Mix and Agent's Beliefs," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 113-139, October.
    2. Dennis Bonam & Bart Hobijn, 2016. "Generalized stability of monetary unions under regime switching in monetary and fiscal policies," DNB Working Papers 524, Netherlands Central Bank, Research Department.
    3. Lhuissier, Stéphane & Zabelina, Margarita, 2015. "On the stability of Calvo-style price-setting behavior," Journal of Economic Dynamics and Control, Elsevier, vol. 57(C), pages 77-95.
    4. Zakipour-Saber, Shayan, 2019. "State-dependent Monetary Policy Regimes," Research Technical Papers 4/RT/19, Central Bank of Ireland.
    5. Bianchi, Francesco & Kung, Howard & Tirskikh, Mikhail, 2019. "The Origins and Effects of Macroeconomic Uncertainty," CEPR Discussion Papers 13450, C.E.P.R. Discussion Papers.
    6. Barthélemy, Jean & Marx, Magali, 2017. "Solving endogenous regime switching models," Journal of Economic Dynamics and Control, Elsevier, vol. 77(C), pages 1-25.
    7. repec:spr:empeco:v:54:y:2018:i:3:d:10.1007_s00181-017-1256-z is not listed on IDEAS

    More about this item

    Keywords

    Markov-switching; Mean-square stability; Determinacy; Forward method; No-bubble condition;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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