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Endogenous Monetary Policy Regime Change

In: NBER International Seminar on Macroeconomics 2006

  • Troy Davig
  • Eric M. Leeper

This paper makes changes in monetary policy rules (or regimes) endogenous. Changes are triggered when certain endogenous variables cross specified thresholds. Rational expectations equilibria are examined in three models of threshold switching to illustrate that (i) expectations formation effects generated by the possibility of regime change can be quantitatively important; (ii) symmetric shocks can have asymmetric effects; (iii) endogenous switching is a natural way to formally model preemptive policy actions. In a conventional calibrated model, preemptive policy shifts agents’ expectations, enhancing the ability of policy to offset demand shocks; this yields a quantitatively significant “preemption dividend.”

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This chapter was published in:
  • Lucrezia Reichlin & Kenneth West, 2008. "NBER International Seminar on Macroeconomics 2006," NBER Books, National Bureau of Economic Research, Inc, number reic08-1, October.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 7039.
    Handle: RePEc:nbr:nberch:7039
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