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State-Dependent Probability Distributions in Non Linear Rational Expectations Models

  • Barthélemy, J.
  • Marx, M.

In this paper, we provide solution methods for non-linear rational expectations models in which regime-switching or the shocks themselves may be "endogenous", i.e. follow state-dependent probability distributions. We use the perturbation approach to find determinacy conditions, i.e. conditions for the existence of a unique stable equilibrium. We show that these conditions directly follow from the corresponding conditions in the exogenous regime-switching model. Whereas these conditions are difficult to check in the general case, we provide for easily verifiable and sufficient determinacy conditions and first-order approximation of the solution for purely forward-looking models. Finally, we illustrate our results with a Fisherian model of inflation determination in which the monetary policy rule may change across regimes according to a state-dependent transition probability matrix.

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Paper provided by Banque de France in its series Working papers with number 347.

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Length: 30 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:bfr:banfra:347
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