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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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    More about this item

    Keywords

    Markov-switching; Mean-square stability; Determinacy; Forward method; No-bubble condition;
    All these keywords.

    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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