Bayesian Analysis of DSGE Models with Regime Switching

37 Pages Posted: 24 Nov 2008 Last revised: 6 Apr 2016

See all articles by Yunjong Eo

Yunjong Eo

The University of Sydney - School of Economics

Date Written: February 11, 2009

Abstract

I estimate DSGE models with recurring regime changes in monetary policy (inflation target and reaction coefficients), technology (growth rate and volatility), and/or nominal price rigidities. In the models, agents are assumed to know deep parameter values but make probabilistic inference about prevailing and future regimes based on Bayes' rule. I develop an estimation method that takes these probabilistic inferences into account when relating state variables to observed data. In an application to postwar U.S. data, I find stronger support for regime switching in monetary policy than in technology or nominal rigidities. In addition, a model with regime switching policy that conforms to the long-run Taylor principle given in Davig and Leeper (2007) is preferred to a determinacy-indeterminacy model motivated by Lubik and Schorfheide (2004). These empirical results indicate that, even though a passive policy regime produced more volatility in the economy from the early 1970s to the mid-1980s, the economy can be explained by determinacy over the entire postwar period, implying no role for sunspot shocks in explaining the changes in volatility.

Keywords: New Keynesian DSGE, Markov-switching, Monetary Policy, Indeterminacy, Long-run Taylor Principle, Bayesian Analysis

JEL Classification: C11, C32, C51, C52, E32, E52

Suggested Citation

Eo, Yunjong, Bayesian Analysis of DSGE Models with Regime Switching (February 11, 2009). Available at SSRN: https://ssrn.com/abstract=1304623 or http://dx.doi.org/10.2139/ssrn.1304623

Yunjong Eo (Contact Author)

The University of Sydney - School of Economics ( email )

Social Sciences Building (A02)
Sydney, NSW 2006
Australia

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