Understanding Markov-Switching Rational Expectations Models
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NBER Working Paper No. 14710
Issued in February 2009
NBER Program(s): EFG ME
We develop a set of necessary and sufficient conditions for equilibria to be determinate in a class of forward-looking Markov-switching rational expectations models and we develop an algorithm to check these conditions in practice. We use three examples, based on the new-Keynesian model of monetary policy, to illustrate our technique. Our work connects applied econometric models of Markov-switching with forward looking rational expectations models and allows an applied researcher to construct the likelihood function for models in this class over a parameter space that includes a determinate region and an indeterminate region.
Published: Farmer, Roger E.A. & Waggoner, Daniel F. & Zha, Tao, 2009.
"Understanding Markov-switching rational expectations models,"
Journal of Economic Theory,
Elsevier, vol. 144(5), pages 1849-1867, September.
This paper is available as PDF (713 K) or via email.
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