Regime switches, Agents’ Beliefs, and Post-World War II U.S. Macroeconomic Dynamics

Francesco Bianchi

MPRA Paper from University Library of Munich, Germany

Abstract: The evolution of inflation and output over the last 50 years is examined through the lens of a micro-founded model that allows for changes in the behavior of the Federal Reserve and in the volatility of structural shocks. Agents are aware of the possibility of regime changes and their beliefs have an impact on the law of motion underlying the macroeconomy. The results support the view that there were regime switches in the conduct of monetary policy. However, the behavior of the Federal Reserve is identified by repeated fluctuations between a Hawk- and a Dove- regime, instead of by the traditional pre- and post- Volcker structure. Counterfactual simulations show that if agents had anticipated the appointment of an extremely conservative Chairman, inflation would not have reached the peaks of the late `70s and the inflation-output trade-off would have been less severe. These "beliefs counterfactuals" are new in the literature. Finally, the paper provides a Bayesian algorithm to handle the technical difficulties that arise in a rational expectations model with Markov-switching regimes.

Keywords: Beliefs; Markov-switching; DSGE; Monetary Policy; Bayesian (search for similar items in EconPapers)
JEL-codes: C11 E31 E58 (search for similar items in EconPapers)
Date: 2008-09-19, Revised 2010-01-19
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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Related works:
Journal Article: Regime Switches, Agents' Beliefs, and Post-World War II U.S. Macroeconomic Dynamics (2013)
Working Paper: Regime Switches, Agents’ Beliefs, and Post-World War II U.S. Macroeconomic Dynamics (2012)
Working Paper: Regime Switches, Agents' Beliefs, and Post-World War II U.S. Macroeconomic Dynamics (2010)
Working Paper: Regime Switches, Agents’ Beliefs, and Post-World War II U.S. Macroeconomic Dynamics (2009)
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