Farmer, Roger E. A. <br/><br/>
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. .
<br/><br/> September 2006. 
<br/><br/> 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. 
<br/><br/>
<br/><br/><br/>System requirements: Adobe [Acrobat] Reader required for PDF files. <br/>Mode of access: World Wide Web.