Indeterminacy in a Forward Looking Regime Switching Model

Roger Farmer, Tao Zha and ,
Authors registered in the RePEc Author Service: Daniel F. Waggoner

No 5919, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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.

Keywords: Indeterminacy; Regime switching; Taylor principle (search for similar items in EconPapers)
JEL-codes: C3 E4 E5 (search for similar items in EconPapers)
Date: 2006-10
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

Downloads: (external link)
https://cepr.org/publications/DP5919 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Indeterminacy in a forward‐looking regime switching model (2009)
Working Paper: Indeterminacy in a forward-looking regime-switching model (2007)
Working Paper: Indeterminacy in a Forward Looking Regime Switching Model (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:5919

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP5919

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().