Indeterminacy in a Forward Looking Regime Switching Model /
Farmer, Roger E. A.
Indeterminacy in a Forward Looking Regime Switching Model / Roger E. A. Farmer, Daniel F. Waggoner, Tao Zha. - Cambridge, Mass. National Bureau of Economic Research 2006. - 1 online resource: illustrations (black and white); - NBER working paper series no. w12540 . - Working Paper Series (National Bureau of Economic Research) no. w12540. .
September 2006.
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.
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Indeterminacy in a Forward Looking Regime Switching Model / Roger E. A. Farmer, Daniel F. Waggoner, Tao Zha. - Cambridge, Mass. National Bureau of Economic Research 2006. - 1 online resource: illustrations (black and white); - NBER working paper series no. w12540 . - Working Paper Series (National Bureau of Economic Research) no. w12540. .
September 2006.
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.
System requirements: Adobe [Acrobat] Reader required for PDF files.
Mode of access: World Wide Web.