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Endogenous Monetary Policy Regime Change


Troy Davig


Federal Reserve Bank of Kansas City

Eric M. Leeper


Indiana University at Bloomington - Department of Economics; National Bureau of Economic Research (NBER); Monash University, Department of Economics

August 28, 2006

CAEPR Working Paper No. 2006-002

Abstract:     
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."

Number of Pages in PDF File: 36

Keywords: Markov switching, Taylor rule, expectations formation

JEL Classification: E31, E32, E52, E58

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Date posted: September 28, 2006  

Suggested Citation

Davig, Troy and Leeper, Eric M., Endogenous Monetary Policy Regime Change (August 28, 2006). CAEPR Working Paper No. 2006-002. Available at SSRN: http://ssrn.com/abstract=932673 or http://dx.doi.org/10.2139/ssrn.932673

Contact Information

Troy Davig (Contact Author)
Federal Reserve Bank of Kansas City ( email )
1 Memorial Dr.
Kansas City, MO 64198
United States
Eric Michael Leeper
Indiana University at Bloomington - Department of Economics ( email )
304 Wylie Hall
Bloomington, IN 47405-6620
United States
812-855-9157 (Phone)
812-855-3736 (Fax)

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Monash University, Department of Economics ( email )
Wellington Road
Clayton, Victoria 3168
Australia
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