State-Dependent Probability Distributions in Non Linear Rational Expectations Models

30 Pages Posted: 28 Oct 2011

Date Written: October 1, 2011

Abstract

In this paper, we provide solution methods for non-linear rational expectations models in which regime-switching or the shocks themselves may be "endogenous," i.e. follow state-dependent probability distributions. We use the perturbation approach to find determinacy conditions, i.e. conditions for the existence of a unique stable equilibrium. We show that these conditions directly follow from the corresponding conditions in the exogenous regime-switching model. Whereas these conditions are difficult to check in the general case, we provide for easily verifiable and sufficient determinacy conditions and first-order approximation of the solution for purely forward-looking models. Finally, we illustrate our results with a Fisherian model of inflation determination in which the monetary policy rule may change across regimes according to a state-dependent transition probability matrix.

Keywords: Perturbation methods, monetary policy, indeterminacy, regime switching, DSGE

JEL Classification: E32, E43

Suggested Citation

Barthelemy, Jean and Marx, Magali, State-Dependent Probability Distributions in Non Linear Rational Expectations Models (October 1, 2011). Banque de France Working Paper No. 347, Available at SSRN: https://ssrn.com/abstract=1950568 or http://dx.doi.org/10.2139/ssrn.1950568

Jean Barthelemy (Contact Author)

Banque de France ( email )

Paris
France

Magali Marx

Banque de France ( email )

Paris
France

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
38
Abstract Views
461
PlumX Metrics