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Endogenous Monetary Policy Regime Change

36 Pages Posted: 28 Sep 2006  

Troy Davig

Federal Reserve Bank of Kansas City

Eric M. Leeper

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

Multiple version iconThere are 2 versions of this paper

Date Written: August 28, 2006

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."

Keywords: Markov switching, Taylor rule, expectations formation

JEL Classification: E31, E32, E52, E58

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: https://ssrn.com/abstract=932673 or http://dx.doi.org/10.2139/ssrn.932673

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

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