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Perturbation Methods for Markov-Switching Models

Listed author(s):
  • Tao Zha

    (FRB Atlanta)

  • Juan F. Rubio-Ramirez

    (Duke U and FRB Atlanta)

  • Daniel F. Waggoner

    (FRB Atlanta)

  • Andrew T. Foerster

    (Duke University)

This paper develops a methodology for approximating rational expectations models with Markov Switching. Specifically, we consider how to do both linear and higher-order approximations, including cases when each individual regime is associated with it's own steady state. We document the importance of using higher-order approximations in economies that have parameter switching that affects variances. We illustrate our algorithm by considering a standard real business cycle economy with Markov switching in total factor productivity drift and variance and assess the accuracy of our approximations. Our method allows for further empirical analysis of economies with Markov switching.

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Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 239.

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Date of creation: 2010
Handle: RePEc:red:sed010:239
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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