Minimal state variable solutions to Markov-switching rational expectations models

Roger Farmer, Daniel Waggoner and Tao Zha

Journal of Economic Dynamics and Control, 2011, vol. 35, issue 12, 2150-2166

Abstract: We develop a new method for deriving minimal state variable (MSV) equilibria of a general class of Markov switching rational expectations models and a new algorithm for computing these equilibria. We compare our approach to previously known algorithms, and we demonstrate that ours is both efficient and more reliable than previous methods in the sense that it is able to find MSV equilibria that previously known algorithms cannot. Further, our algorithm can find all possible MSV equilibria in models. This feature is essential if one is interested in using a likelihood based approach to estimation.

Keywords: Multiple MSV equilibria; Policy changes; Likelihood principle; Quadratic polynomial; E-stability; Iterative algorithm (search for similar items in EconPapers)
JEL-codes: C60 C62 C63 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (126)

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Working Paper: Minimal state variable solutions to Markov-switching rational expectations models (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:35:y:2011:i:12:p:2150-2166

DOI: 10.1016/j.jedc.2011.08.005

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