Title: Monetary policy in a Markov-switching VECM
Subtitle: implications for the cost of disinflation and the price puzzle
Description: "Monetary policy VARs typically presume stability of the long-run outcomes.  We introduce the possibility of switches in the long-run equilibrium in a cointegrated VAR by allowing both the covariance matrix and weighting matrix in the error-correction term to switch.  We find that monetary policy alternates between sustaining long-run growth and disinflationary regimes.  Allowing state changes can also help explain the price puzzle and justify the use of commodity prices as a corrective measure.  Finally, we show that regime-switching has implications for disinflationary monetary policy and can explain the variety of sacrifice ratio estimates that exist in the literature"--Federal Reserve Bank of St. Louis web site.
Subjects: Monetary policy