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Origins of monetary policy shifts: A New approach to regime switching in DSGE models

Yoosoon Chang, Junior Maih () and Fei Tan

Journal of Economic Dynamics and Control, 2021, vol. 133, issue C

Abstract: We examine monetary policy shifts by taking a new approach to regime switching in a small scale DSGE model with threshold-type switching in the monetary policy rule. The policy response to inflation is allowed to switch endogenously between two regimes, hawkish and dovish, depending on whether a latent regime factor crosses a threshold level. Endogeneity stems from the historical impacts of structural shocks driving the economy on the regime factor. By estimating our DSGE model using the U.S. data, we quantify the endogenous feedback from each structural shock to the regime factor to understand the sources of the observed policy shifts. This new channel sheds new light on the interaction between policy changes and measured economic behavior.

Keywords: Monetary policy; DSGE Model; Regime switching; Latent autoregressive regime factor; Endogenous feedback; Expectations formation effects (search for similar items in EconPapers)
JEL-codes: C13 C32 E52 (search for similar items in EconPapers)
Date: 2021
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Working Paper: Origins of Monetary Policy Shifts: A New Approach to Regime Switching in DSGE Models (2018) Downloads
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DOI: 10.1016/j.jedc.2021.104235

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