Understanding Markov-Switching Rational Expectations Models

26 Pages Posted: 17 Mar 2015

See all articles by Roger E. A. Farmer

Roger E. A. Farmer

University of Warwick; University of California, Los Angeles (UCLA) - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); National Institute of Economic and Social Research (NIESR)

Daniel F. Waggoner

Federal Reserve Bank of Atlanta

Tao A. Zha

Federal Reserve Bank of Atlanta; Emory University

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2009

Abstract

We develop a set of necessary and sufficient conditions for equilibria to be determinate in a class of forward-looking Markov-switching rational expectations models, and we develop an algorithm to check these conditions in practice. We use three examples, based on the new Keynesian model of monetary policy, to illustrate our technique. Our work connects applied econometric models of Markov switching with forward-looking rational expectations models and allows an applied researcher to construct the likelihood function for models in this class over a parameter space that includes a determinate region and an indeterminate region.

Keywords: stability, nonlinearity, unique equilibrium, cross-regime indeterminacy, expectations formation, necessary and sufficient conditions

JEL Classification: E5

Suggested Citation

Farmer, Roger E.A. and Waggoner, Daniel F. and Zha, Tao A., Understanding Markov-Switching Rational Expectations Models (March 1, 2009). FRB Atlanta Working Paper 2009-5, Available at SSRN: https://ssrn.com/abstract=2482329 or http://dx.doi.org/10.2139/ssrn.2482329

Roger E.A. Farmer

University of Warwick ( email )

Coventry CV4 7AL
United Kingdom

HOME PAGE: http://Rogerfarmer.com

University of California, Los Angeles (UCLA) - Department of Economics ( email )

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Daniel F. Waggoner

Federal Reserve Bank of Atlanta ( email )

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Tao A. Zha (Contact Author)

Federal Reserve Bank of Atlanta ( email )

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Emory University ( email )

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