Indeterminacy in a forward-looking regime-switching model
By: Roger E.A. Farmer, Daniel F. Waggoner, and Tao Zha
Contributors: Waggoner, Daniel F.; Zha, Tao; Federal Reserve Bank of Atlanta
Series: Working paper series / Federal Reserve Bank of Atlanta -- 2006-19; Working paper series (Federal Reserve Bank of Atlanta : Online) -- 2006-19.
Publisher: Federal Reserve Bank of Atlanta
Published: 2006
Place of publication: Atlanta, Ga.]
Language: eng
Format: [electronic resource] /
Description: "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 nonfundamental equilibria in MRSE models than in the single-regime case where the Taylor principle is known to guarantee local uniqueness."--Federal Reserve Bank of Atlanta web site.
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