Estimating a Taylor Rule with Markov Switching Regimes for Switzerland

Alexander Perruchoud

Swiss Journal of Economics and Statistics (SJES), 2009, vol. 145, issue II, pages 187-220

Abstract: In this paper a Taylor rule including the exchange rate gap is estimated for Switzerland under the assumption that the parameters depend on two states governed by a Markov switching process. The estimates suggest the presence of an ordinary and an aggressive regime. The former is characterized by a high degree of interest rate smoothing and by significant reactions to inflation and the output gap. The aggressive regime shows much less smoothing, an aggressive reaction to inflation, and a large coefficient on the exchange rate gap. Furthermore, an asymmetry in the occurrence of the two regimes is found.

Keywords: Taylor rule; Markov switching; Non-constant transition probabilities; Maximum likelihood; EM algorithm (search for similar items in EconPapers)
JEL-codes: C22 E52 E58 (search for similar items in EconPapers)
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:ses:arsjes:2009-ii-4

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