|
Expectational Stability in Regime-Switching Rational Expectations Models By William A. Branch,
Troy Davig, and Bruce McGough |
|
Abstract Regime-switching rational expectations models, in which
the parameters of the model evolve according to a finite state Markov
process, have properties that differentiate them from linear models. Issues
that are well understood in linear contexts, such as equilibrium determinacy
and stability under adaptive learning, re-emerge in this new context. This
paper outlines these issues and defines two classes of equilibria that emerge
from regime-switching models. The distinguishing feature between the two
classes is whether the conditional density of the endogenous state variables
depends on past regimes. An assumption on whether agents condition their
expectations on past regimes has important implications for determinacy and
equilibrium dynamics. The paper addresses the stability properties of the
different classes of equilibria under adaptive learning, extending the
learning literature to a non-linear framework.
Back to top RWP home |