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Solving Endogenous Regime Switching Models



Type:   Working paper
Title:   Solving Endogenous Regime Switching Models
Author(s):   Barthélemy, Jean - Département d'économie (Author)
Marx, Magali - Département d'économie (Author)
Date issued:   2016-11
Publisher:   Paris  :  SciencesPo Economics Discussion Papers
Series:   SciencesPo Economics Discussion Papers  :  2016-07
Keywords:   [en] Regime switching, Rational expectations models, Indeterminacy, Perturbation methods
JEL:   E32,  E43
Abstract:   [en] This paper solves rational expectations models in which structural parameters switch across multiple regimes according to state-dependent (endogenous) transition probabilities. Assuming small shocks and smooth transition probabilities, we apply a perturbation approach. We first provide for conditions under which a unique bounded equilibrium exists. We then compute first- and second-order approximations. In a new-Keynesian model with monetary policy switching, we document new effects of monetary policy switching when transition probabilities depend on inflation.


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