 Optimal policy in Markov-switching rational expectations modelsAndrew Blake and Fabrizio Zampolli Journal of Economic Dynamics and Control, 2011, vol. 35, issue 10, 1626-1651 Abstract: In this paper we consider the optimal quadratic control problem of Markov-switching linear rational expectation models. These models are general and flexible tools for modelling not only regime but also model or parameter uncertainty. We show, first, how to find the solution of a Markov-switching linear rational expectation model. Based on this solution we then show how to apply dynamic programming to find the optimal time-consistent policy and the resulting Nash-Stackelberg equilibrium. Suitable modifications of the algorithm allow to deal with the (non-RE) case in which the policymaker and the private sector hold different beliefs or probabilities over regime change. We also show how the optimisation procedure can be employed to obtain the optimal policy under commitment. As an illustration we compute the optimal policy in a small open economy subject to stochastic structural breaks in some of its key parameters. Keywords: Optimal; monetary; policy; Regime; switching; Rational; expectations; Time; consistency; Commitment (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:35:y:2011:i:10:p:1626-1651 Access Statistics for this article Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok More articles in Journal of Economic Dynamics and Control from Elsevier |
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