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Indeterminacy in a forward‐looking regime switching model
Author(s) -
Farmer Roger E. A.,
Waggoner Daniel F.,
Zha Tao
Publication year - 2009
Publication title -
international journal of economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 11
eISSN - 1742-7363
pISSN - 1742-7355
DOI - 10.1111/j.1742-7363.2008.00094.x
Subject(s) - uniqueness , indeterminacy (philosophy) , bounded function , mathematical economics , mathematics , markov chain , economics , mathematical analysis , statistics , physics , quantum mechanics
This paper considers the properties of Markov switching rational expectations (MSRE) models. We discuss possible solution concepts for MSRE models, distinguishing between stationary and bounded equilibria. For the case of models with one variable we provide a necessary and sufficient condition for uniqueness of a bounded equilibrium and we relate this condition to an alternative, the “generalized Taylor principle,” suggested by Davig and Leeper. We provide examples of models with multiple bounded and multiple stationary equilibria which suggest that it might be more difficult to rule out non‐fundamental equilibria in MSRE models than in the single regime case where the Taylor principle is known to guarantee local uniqueness.