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Minimal State Variable Solutions to Markov-switching Rational Expectations Models

Listed author(s):
  • Roger E. A. Farmer
  • Daniel F. Waggoner
  • Tao Zha

We develop a new method for deriving minimal state variable (MSV) equilibria of a general class of Markov-switching rational expectations models and a new algorithm for computing these equilibria. We compare our approach to previously known algorithms, and we demonstrate that ours is both efficient and more reliable than previous methods in the sense that it is able to find MSV equilibria that previously known algorithms cannot. Further, our algorithm can find all possible MSV equilibria in models where there are multiple MSV equilibria. This feature is essential if one is interested in using a likelihood based approach to estimation.

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File URL: http://economics.emory.edu/home/assets/workingpapers/zha_10_03_paper.pdf
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Paper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number 1003.

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Date of creation: Apr 2010
Handle: RePEc:emo:wp2003:1003
Contact details of provider: Web page: http://economics.emory.edu/home/journals/
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