A Note on Regime Switching, Monetary Policy, and Multiple Equilibria
When monetary policy is subject to regime switches conditions for determinacy become more complex. Davig and Leeper (2007) and Farmer, Waggoner and Zha (2009a) have studied such conditons. Using some new results from stochastic processes, we characterize the moments of the stationary distribution of inflation under regime switiching to obtain conditions for indeterminacy that can be easily checked and interpreted in terms of expected values of Taylor coefficients. In the last section, we outline methods to compute the moments of stationary distributions in regime switching models of higher dimensions.
I would like to thank Florin Bilbiie, Troy Davig, Roger Farmer, Eric Leeper, Daniel Waggoner and Tao Zha for very useful comments and suggestions. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.