TY  - JOUR
AU  - Farmer,Roger E. A.
AU  - Waggoner,Daniel F.
AU  - Zha,Tao
TI  - Indeterminacy in a Forward Looking Regime Switching Model
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12540
PY  - 2006
Y2  - September 2006
UR  - http://www.nber.org/papers/w12540
L1  - http://www.nber.org/papers/w12540.pdf
N1  - Author contact info:
Roger Farmer
UCLA
Department of Economics
Box 951477
Los Angeles, CA 90095-1477
Tel: 310/825-6547
Fax: 310/825-9528
E-Mail: rfarmer@econ.ucla.edu

Daniel F. Waggoner
Federal Reserve Bank of Atlanta
1000 Peachtree Street N.E.
Atlanta, Georgia 30309-4470
E-Mail: dwaggoner@frbatlanta.org

Tao Zha
Emory University
1602 Fishburne Drive
Atlanta, GA 30322-2240
Tel: 404/723-3254
Fax: 404/727-4639
E-Mail: tzha@emory.edu
AB  - This paper is about the properties of Markov switching rational expectations (MSRE) models. We present a simple monetary policy model that switches between two regimes with known transition probabilities. The first regime, treated in isolation, has a unique determinate rational expectations equilibrium and the second contains a set of indeterminate sunspot equilibria. We show that the Markov switching model, which randomizes between these two regimes, may contain a continuum of indeterminate equilibria. We provide examples of stationary sunspot equilibria and bounded sunspot equilibria which exist even when the MSRE model satisfies a 'generalized Taylor principle'. Our result suggests that it may be more difficult to rule out non-fundamental equilibria in MRSE models than in the single regime case where the Taylor principle is known to guarantee local uniqueness.
ER  -