Determinacy and classification of Markov-switching rational expectations models

Cho, Seonghoon

doi:10.1016/j.jedc.2021.104115

Cited by 5 publications

(15 citation statements)

References 28 publications

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“…As shown in Foerster et al (2016), the first-order derivatives can be obtained using different solution methods. In particular, the first-order derivatives are obtained using the minimum of modulus solution method of Cho (2021). Second-and third-order derivatives are calculated by recursively solving linear systems of equations, as demonstrated in Foerster et al (2016).…”

Section: Government and Bond Supplymentioning

confidence: 99%

Discount Rates, Debt Maturity, and the Fiscal Theory

CORHAY,

KIND,

KUNG

et al. 2023

The Journal of Finance

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This paper examines how the transmission of government portfolio risk arising from maturity operations depends on the stance of monetary/fiscal policy. Accounting for risk premia in the fiscal theory allows the government portfolio to affect expected inflation, even in a frictionless economy. The effects of maturity rebalancing on expected inflation in the fiscal theory depend directly on the conditional nominal term premium, giving rise to an optimal debt‐maturity policy that is state‐dependent. In a calibrated macrofinance model, we demonstrate that maturity operations have sizable effects on expected inflation and output through our novel risk transmission mechanism.

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Section: Government and Bond Supplymentioning

confidence: 99%

Discount Rates, Debt Maturity, and the Fiscal Theory

CORHAY,

KIND,

KUNG

et al. 2023

The Journal of Finance

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“…Although alternative notions of stability—for example, covariance stationarity, bounded stability, MSS, etc.—coincide in linear models with fixed coefficients, this is not the case under regime switching, and one has therefore to take a stand on the appropriate stability concept to adhere to. We follow FWZ and Cho (2016, 2021), and adopt MSS as the most appropriate stability concept for the determinacy of MRS‐REE. Having adopted the same stability notion for an SCEE, this will also allow a meaningful comparison between the parametric regions of existence (and the related persistence) of these alternative equilibrium concepts.…”

Section: A Fisherian Model Of Inflation Determinationmentioning

confidence: 99%

“…In doing so, we make use of the necessary and sufficient conditions for determinacy of an MRS‐REE developed by Cho (2016, 2021). From FWZ, any RE solution to () can be written as the sum of a regime‐switching minimum state variable (MSV) solution

π_{t}^{f}

(the fundamental component) and a sunspot

w_{t}

(the nonfundamental component):

π_{t} = \underset{π_{t}^{f}}{\underset{ψ (s_{t}) r_{t} + π_{t}^{*}}{true}} + w_{t}

for

s_{t} = 1, 2

.…”

Section: A Fisherian Model Of Inflation Determinationmentioning

confidence: 99%

“…process for

ξ_{t + 1}

. Following Cho (2016, 2021), the process () is not MSS—hence, the solution

π_{t} = π_{t}^{f}

is the unique (hence, determinate) MRS‐REE—if and only if all eigenvalues of the following matrix:

Φ \equiv [\begin{matrix} p_{11} / ϕ_{1}^{2} & (1 - p_{22}) / ϕ_{1}^{2} \\ (1 - p_{11}) / ϕ_{2}^{2} & p_{22} / ϕ_{2}^{2} \end{matrix}],

lie inside the unit circle in the complex plane. The following proposition states analytical conditions for this to be the case:Proposition The MRS model () possess a determinate REE if and only if

ϕ_{2} > \sqrt{p_{22}}

and

ϕ_{1} > g false(ϕ_{2} false) \equiv {((), \frac{1 - p_{11} - p_{22} + p_{11} ϕ_{2}^{2}}{ϕ_{2}^{2} - p_{22}})}^{\frac{1}{2}},

where the threshold

g (ϕ_{2})

satisfies the following properties: (i) it is strictly decreasing and convex with respect to

ϕ_{2};

(ii)

\lim_{ϕ_{2} \to \sqrt{p_{22}}} g false(ϕ_{2} false) = \infty

and

\lim_{ϕ_{2} \to \infty} g false(ϕ_{2} false) = \sqrt{p_{11}};

(iii)

g (ϕ_{2}) ⪌ 1

for

…”

Section: A Fisherian Model Of Inflation Determinationmentioning

confidence: 99%

“…(2009a, 2009b, 2010). In the article, we focus on mean‐square‐stability and make use of some recent results by Cho (2016, 2021). Ozden and Wouters (2021) study the policy implications of regime‐switching policies under constant gain learning in a medium‐scale DSGE model à la Smets and Wouters (2007).…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Consistent Expectations Equilibria in Markov Regime Switching Models and Inflation Dynamics

Airaudo

Hajdini

2021

Int Economic Review

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We study the existence of Stochastic Consistent Expectations Equilibria (SCEE) in linear Markov regime switching models. An SCEE exists when the model‐implied mean and first‐order autocorrelation coincide with those predicted by the agents via misspecified forecasting rules. For a simple regime‐switching monetary policy model, the parametric space where at least one SCEE exists is rather wide, and may extend well beyond the rational expectations equilibrium determinacy frontier. Misspecified expectations combined with regime switching yield a strong endogenous amplification mechanism that help generate the near unit root dynamics for inflation observed in the United States before the Great Moderation.

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