Indeterminacy in a Forward Looking Regime Switching Model / Roger E. A. Farmer, Daniel F. Waggoner, Tao Zha.

Format:

Book

Author/Creator:

Farmer, Roger E. A.

Contributor:

National Bureau of Economic Research.

Waggoner, Daniel F.

Zha, Tao.

Series:

Working Paper Series (National Bureau of Economic Research) no. w12540.

NBER working paper series no. w12540

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2006.

Summary:

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.

Notes:

Print version record

September 2006.