State-Dependent Probability Distributions in Non Linear Rational Expectations Models

Abstract: In this paper, we provide solution methods for non-linear rational expectations models in which regime-switching or the shocks themselves may be "endogenous", i.e. follow state-dependent probability distributions. We use the perturbation approach to find determinacy conditions, i.e. conditions for the existence of a unique stable equilibrium. We show that these conditions directly follow from the corresponding conditions in the exogenous regime-switching model. Whereas these conditions are difficult to check in the general case, we provide for easily verifiable and sufficient determinacy conditions and first-order approximation of the solution for purely forward-looking models. Finally, we illustrate our results with a Fisherian model of inflation determination in which the monetary policy rule may change across regimes according to a state-dependent transition probability matrix.

Keywords: Perturbation methods; monetary policy; indeterminacy; regime switching; DSGE. (search for similar items in EconPapers)
JEL-codes: E32 E43 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2011
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Working Paper: State-Dependent Probability Distributions in Non Linear Rational Expectations Models (2013)
Working Paper: State-Dependent Probability Distributions in Non Linear Rational Expectations Models (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:347

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