Bayesian Analysis of DSGE Models with Regime Switching

Yunjong Eo

MPRA Paper from University Library of Munich, Germany

Abstract: I estimate DSGE models with recurring regime changes in monetary policy (inflation target and reaction coefficients), technology (growth rate and volatility), and/or nominal price rigidities. In the models, agents are assumed to know deep parameter values but make probabilistic inference about prevailing and future regimes based on Bayes’ rule. I develop an estimation method that takes these probabilistic inferences into account when relating state variables to observed data. In an application to postwar U.S. data, I find stronger support for regime switching in monetary policy than in technology or nominal rigidities. In addition, a model with regime switching policy that conforms to the long-run Taylor principle given in Davig and Leeper (2007) is preferred to a determinacy-indeterminacy model motivated by Lubik and Schorfheide (2004). These empirical results indicate that, even though a passive policy regime produced more volatility in the economy from the early 1970s to the mid-1980s, the economy can be explained by determinacy over the entire postwar period, implying no role for sunspot shocks in explaining the changes in volatility.

Keywords: New Keynesian DSGE; Markov-switching; Monetary Policy; Indeterminacy; Long-run Taylor Principle; Bayesian Analysis (search for similar items in EconPapers)
JEL-codes: C11 C32 C51 C52 E32 E52 (search for similar items in EconPapers)
Date: 2008-08, Revised 2009-02-11
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ets, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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https://mpra.ub.uni-muenchen.de/70532/9/MPRA_paper_70532.pdf revised version (application/pdf)

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