Indeterminacy in a Forward Looking Regime Switching Model

Roger Farmer, Daniel Waggoner and Tao Zha

No 12540, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper is about the properties of Markov switching rational expectations (MSRE) models. We present a simple monetary policy model that switches between two regimes with known transition probabilities. The first regime, treated in isolation, has a unique determinate rational expectations equilibrium and the second contains a set of indeterminate sunspot equilibria. We show that the Markov switching model, which randomizes between these two regimes, may contain a continuum of indeterminate equilibria. We provide examples of stationary sunspot equilibria and bounded sunspot equilibria which exist even when the MSRE model satisfies a 'generalized Taylor principle'. Our result suggests that it may be more difficult to rule out non-fundamental equilibria in MRSE models than in the single regime case where the Taylor principle is known to guarantee local uniqueness.

JEL-codes: E31 E4 E52 (search for similar items in EconPapers)
Date: 2006-09
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: EFG
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Citations: View citations in EconPapers (12)

Published as Roger E. A. Farmer & Daniel F. Waggoner & Tao Zha, 2009. "Indeterminacy in a forward-looking regime switching model," International Journal of Economic Theory, The International Society for Economic Theory, vol. 5(1), pages 69-84.

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Related works:
Journal Article: Indeterminacy in a forward‐looking regime switching model (2009)
Working Paper: Indeterminacy in a forward-looking regime-switching model (2007)
Working Paper: Indeterminacy in a Forward Looking Regime Switching Model (2006)
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