Sufficient Conditions for Determinacy in a Class of Markov-Switching Rational Expectations Models

Seonghoon Cho

Review of Economic Dynamics, 2016, vol. 21, 182-200

Abstract: Markov-switching rational expectations (MSRE) models can bring out fresh insights beyond what linear rational expectations models have done for macroeconomics, as noted and predicted by Davig and Leeper (2007) and Farmer, Waggoner and Zha (2009), among others. However, a lack of tractable methodological foundations may have hindered researchers from uncovering the salient features of MSRE models. This study proposes a solution method and derives very tractable sufficient conditions for determinacy and indeterminacy in the mean-square stability sense in general MSRE models with lagged endogenous variables. These tasks are accomplished by extending the forward method of Cho and Moreno (2011) developed for linear rational expectations models to MSRE. We apply our methodology to a New-Keynesian model subject to regime-switching in monetary policy and find some unforeseen but intuitive determinacy results. (Copyright: Elsevier)

Keywords: Markov-switching; Mean-square stability; Determinacy; Forward method; No-bubble condition (search for similar items in EconPapers)
JEL-codes: C61 C62 D84 E42 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (26)

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DOI: 10.1016/j.red.2015.03.001

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