Generalizing the Taylor Principle: New Comment

25 Pages Posted: 30 Oct 2012

Date Written: October 1, 2012

Abstract

In this paper, we provide determinacy conditions, i.e. conditions ensuring the existence and uniqueness of a bounded solution, in a purely forward-looking linear Markov switching rational expectations model. We thus settle the debate between Davig and Leeper (2007) and Farmer et al. (2010). The conditions derived by the former are valid in a subset of bounded solutions only depending on a finite number of past regimes, that we call Markovian. However, in the complete bounded solution space, the new determinacy conditions we derive are tighter. Nevertheless, when unique, the solution coincides with the Markovian solution of Davig and Leeper (2007). We finally illustrate our results in the standard new-Keynesian model studied by Davig and Leeper (2007) and Farmer et al. (2010).

Keywords: Markov switching, DSGE, indeterminacy

JEL Classification: E31, E43, E52

Suggested Citation

Barthelemy, Jean and Marx, Magali, Generalizing the Taylor Principle: New Comment (October 1, 2012). Banque de France Working Paper No. 403, Available at SSRN: https://ssrn.com/abstract=2168214 or http://dx.doi.org/10.2139/ssrn.2168214

Jean Barthelemy (Contact Author)

Banque de France ( email )

Paris
France

Magali Marx

Banque de France ( email )

Paris
France

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