Minimal state variable solutions to Markov-switching rational expectations models

We develop a new method for deriving minimal state variable (MSV) equilibria of a general class of Markov switching rational expectations models and a new algorithm for computing these equilibria. We compare our approach to previously known algorithms, and we demonstrate that ours is both efficient...

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Bibliographic Details
Published in:Journal of economic dynamics & control 2011-12, Vol.35 (12), p.2150-2166
Main Authors: Farmer, Roger E.A., Waggoner, Daniel F., Zha, Tao
Format: Article
Language:English
Subjects:
Algorithms
E-stability
Economic models
Equilibrium
Iterative algorithm
Likelihood principle
Markov analysis
Multiple MSV equilibria
Policy changes
Quadratic polynomial
Rational expectations
Studies
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Summary:We develop a new method for deriving minimal state variable (MSV) equilibria of a general class of Markov switching rational expectations models and a new algorithm for computing these equilibria. We compare our approach to previously known algorithms, and we demonstrate that ours is both efficient and more reliable than previous methods in the sense that it is able to find MSV equilibria that previously known algorithms cannot. Further, our algorithm can find all possible MSV equilibria in models. This feature is essential if one is interested in using a likelihood based approach to estimation.
ISSN:0165-1889
1879-1743
DOI:10.1016/j.jedc.2011.08.005