NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Understanding Markov-Switching Rational Expectations Models

Roger E.A. Farmer, Tao Zha, Daniel F. Waggoner

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.

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