Working Paper: NBER ID: w14710
Authors: Roger E.A. Farmer; Tao Zha; Daniel F. Waggoner
Abstract: 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.
Keywords: Markov-switching; Rational expectations; Monetary policy
JEL Codes: C02; C1; E0; E4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Model parameters (C51) | Unique determinate equilibrium (C62) |
| Stability criteria (C62) | Unique determinate equilibrium (C62) |
| Model parameters (C51) | Stability outcomes (C62) |
| Stability outcomes (C62) | Nature of equilibria (D50) |