Generalizing the Taylor Principle: New Comment
25 Pages Posted: 30 Oct 2012
Date Written: October 1, 2012
Abstract
In this paper, we provide determinacy conditions, i.e. conditions ensuring the existence and uniqueness of a bounded solution, in a purely forward-looking linear Markov switching rational expectations model. We thus settle the debate between Davig and Leeper (2007) and Farmer et al. (2010). The conditions derived by the former are valid in a subset of bounded solutions only depending on a finite number of past regimes, that we call Markovian. However, in the complete bounded solution space, the new determinacy conditions we derive are tighter. Nevertheless, when unique, the solution coincides with the Markovian solution of Davig and Leeper (2007). We finally illustrate our results in the standard new-Keynesian model studied by Davig and Leeper (2007) and Farmer et al. (2010).
Keywords: Markov switching, DSGE, indeterminacy
JEL Classification: E31, E43, E52
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Monetary Policy with Model Uncertainty: Distribution Forecast Targeting
By Lars E. O. Svensson and Noah Williams
-
Monetary Policy with Model Uncertainty: Distribution Forecast Targeting
By Lars E. O. Svensson and Noah Williams
-
Generalizing the Taylor Principle
By Troy Davig and Eric M. Leeper
-
Generalizing the Taylor Principle
By Troy Davig and Eric M. Leeper
-
Optimal Monetary Policy in an Operational Medium-Sized DSGE Model
By Jesper Lindé, Malin Adolfson, ...