State-Dependent Probability Distributions in Non Linear Rational Expectations Models

Jean Barthélemy and Magali Marx

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Abstract: In this paper, we provide solution methods for non-linear rational expectations models in which regime-switching or the shocks themselves may be "endogenous", i.e. follow state-dependent probability distributions. We use the perturbation approach to find determinacy conditions, i.e. conditions for the existence of a unique stable equilibrium. We show that these conditions directly follow from the corresponding conditions in the exogenous regime-switching model. Whereas these conditions are diffcult to check in the general case, we provide for easily verifiable and sufficient determinacy conditions and first-order approximation of the solution for purely forward-looking models. Finally, we illustrate our results with a Fisherian model of inflation determination in which the monetary policy rule may change across regimes according to a state-dependent transition probability matrix.

Keywords: Perturbation Methods; Monetary Policy; Indeterminancy; Regime Switching; DGSE (search for similar items in EconPapers)
Date: 2011-10-01
Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03461407
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: State-Dependent Probability Distributions in Non Linear Rational Expectations Models (2013)
Working Paper: State-Dependent Probability Distributions in Non Linear Rational Expectations Models (2011)
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