Design Limits in Regime-Switching Cases
This paper characterizes the derivation and the assessment of design limits in the case of a regime-switching economy. The object of the analysis on design limits is to derive the restrictions on how feedback rules, the Taylor-type rules typically used in monetary economics, affect the frequency fluctuations underlying the state variable of interest. We extend the analysis in a structured context of model uncertainty where the uncertainty is described by the presence of different potential models whose probability of occurrence and switching is given by a known and ergodic Markov Chain transition matrix. The presence of switching modifies the characteristics of design limits in two main aspects. First, when the optimal variance minimizing rule is chosen, frequency specific restrictions appear more or less stringent with the respect to the linear case depending on the probability of switching: the higher it is, the worst is the performance in terms of frequency-specific fluctuations. Second, contrary to the linear case, design limits are also affected by the policy rule so that their role switches from a constraint to an externality that the policymaker may want to take into account.
|Date of creation:||Mar 2008|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.deps.unisi.it/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Farmer, Roger E.A. & Waggoner, Daniel F. & Zha, Tao, 2011.
"Minimal state variable solutions to Markov-switching rational expectations models,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 35(12), pages 2150-2166.
- Roger E. A. Farmer & Daniel F. Waggoner & Tao Zha, 2010. "Minimal State Variable Solutions to Markov-switching Rational Expectations Models," Emory Economics 1003, Department of Economics, Emory University (Atlanta).
- Roger E. A. Farmer & Daniel F. Waggoner & Tao Zha, 2008. "Minimal state variable solutions to Markov-switching rational expectations models," FRB Atlanta Working Paper 2008-23, Federal Reserve Bank of Atlanta.
- Francq, C. & Zakoian, J. -M., 2001.
"Stationarity of multivariate Markov-switching ARMA models,"
Journal of Econometrics,
Elsevier, vol. 102(2), pages 339-364, June.
- Christian Francq & Jean-Michel Zakoïan, 2000. "Stationarity of Multivariate Markov-Switching ARMA Models," Working Papers 2000-32, Centre de Recherche en Economie et Statistique.
- Otrok, Christopher, 2001. "Spectral Welfare Cost Functions," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(2), pages 345-67, May.
- William A. Brock & Steven N. Durlauf, 2004.
"Elements of a Theory of Design Limits to Optimal Policy,"
NBER Working Papers
10495, National Bureau of Economic Research, Inc.
- William A. Brock & Steven N. Durlauf, 2004. "Elements of a Theory of Design Limits to Optimal Policy," Manchester School, University of Manchester, vol. 72(s1), pages 1-18, 09.
- Brock,W.A. & Durlauf,S.N., 2003. "Elements of a theory of design limits to optimal policy," Working papers 25, Wisconsin Madison - Social Systems.
- Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
- Otrok, Christopher & Ravikumar, B. & Whiteman, Charles H., 2002.
"Habit formation: a resolution of the equity premium puzzle?,"
Journal of Monetary Economics,
Elsevier, vol. 49(6), pages 1261-1288, September.
- Otrok, C. & Ravikumar, B. & Whiteman, C., 1998. "Habit Formation: A Resolution of the Equity Premium Puzzle?," Working Papers 98-04, University of Iowa, Department of Economics.
- Brock, William A. & Durlauf, Steven N. & Rondina, Giacomo, 2013.
"Design limits and dynamic policy analysis,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 37(12), pages 2710-2728.
- Pataracchia, Beatrice, 2011.
"The spectral representation of Markov switching ARMA models,"
Elsevier, vol. 112(1), pages 11-15, July.
- Beatrice Pataracchia, 2008. "The Spectral Representation of Markov-Switching Arma Models," Department of Economics University of Siena 528, Department of Economics, University of Siena.
- Brock,W.A. & Durlauf,S.N., 2004.
"Local robustness analysis : theory and application,"
22, Wisconsin Madison - Social Systems.
- Thomas J. Sargent & Riccardo Colacito & Lars P. Hansen & Timothy Cogley, 2008. "Robustness and US Monetary," 2008 Meeting Papers 228, Society for Economic Dynamics.
- Hans, Erwin & Wullink, Gerhard & van Houdenhoven, Mark & Kazemier, Geert, 2008. "Robust surgery loading," European Journal of Operational Research, Elsevier, vol. 185(3), pages 1038-1050, March.
- Li-Lin Ku & Chien-Pai Han, 2008. "Robust testing procedures of process locations," Quality & Quantity: International Journal of Methodology, Springer, vol. 42(5), pages 579-595, October.
When requesting a correction, please mention this item's handle: RePEc:usi:wpaper:529. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Fabrizio Becatti)
If references are entirely missing, you can add them using this form.