Solving Endogenous Regime Switching Models

Jean Barthélemy (1, 2) , Magali Marx (1)

1 Centre de recherche de la Banque de France
2 ECON - Département d'économie (Sciences Po)

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.

Mots clés: Regime switching; Rational expectations models; Indeterminacy; Perturbation methods

Domaines: Economies et finances

Jean Barthélemy, Magali Marx. Solving Endogenous Regime Switching Models. 2016. ⟨hal-03393181⟩