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Assessing Changes in U.S. Monetary Policy in a Regime-Switching Rational Expectations Model

Author

Listed:
  • Roger E. A. Farmer

    (University of California Los Angeles)

  • Tao Zha
  • Dan Waggoner

Abstract

We develop a new method for solving forward-looking rational expectations models with regime change and we apply it to the case of switches in monetary regime in U.S. data. Existing solutions to this problem are nonlinear since the parameters of a Markov switching model are functions of the state. We show how to enlarge the state space to obtain an equivalent problem that is linear in parameters. We show that the solution to the equivalent problem is a VAR with state dependent parameters that can be estimated by conventional methods and we present an application to US data

Suggested Citation

  • Roger E. A. Farmer & Tao Zha & Dan Waggoner, 2006. "Assessing Changes in U.S. Monetary Policy in a Regime-Switching Rational Expectations Model," 2006 Meeting Papers 334, Society for Economic Dynamics.
    • Handle: RePEc:red:sed006:334
    as

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    More about this item

    Keywords

    Regime switching; Rational expectations;

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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