Endogenous Monetary Policy Regime Change

Davig, Troy; Leeper, Eric M.

doi:10.3386/w12405

Cited by 35 publications

(25 citation statements)

References 54 publications

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“…In Brazil, the issue of the sustainability of public debt has aroused strong interest amongst economic analysts, since it plays a central role in the dis-1 Other criticisms of Bohn (2007) regarding the approach based on unit root tests are their low power and sensitivity to sample size, possible non-stationarity related to factors that are not related to the fiscal policy carried out and the fact that, under conventional formulations, structural breaks -frequent in emerging economies -are not allowed. 2 For additional references, see, for international cases: Davig and Leeper (2006), Penalver (2006), Thwaites (2006), Uctum, Thurston and Uctum (2006), Adedeji and Williams (2007), Khalid et al (2007), Greiner and Kauermann (2007), Nguyen (2007), Budina and Wijnbergen (2008), Turrini (2008), Afonso and Hauptmeier (2009), Song (2009), Egert (2010), Stoica and Leonte (2010), Burger et al (2011), Mutuku (2015); and, for the Brazilian case: Luporini (2001), Aguiar (2007), Lopes (2007), Dill (2012) and Jesus (2013).…”

Section: Introductionmentioning

confidence: 99%

A Time-Varying Fiscal Reaction Function for Brazil

Campos

Cysne

2019

Estud. Econ.

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This paper evaluates the sustainability of public debt in Brazil using monthly data from January 2003 to June 2016, based on the estimation of fiscal reaction functions with time-varying coefficients. Three estimation methods are considered: Kalman filter, penalized spline smoothing and time-varying cointegration. Besides indicating that the reaction of the primary deficit to variations in the debt/GDP ratio declined over most of the analyzed period, all these methods lead to the conclusion that the Brazilian public debt, given the parameters then in force, reached an unsustainable trajectory in the last years of the sample.

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Section: Introductionmentioning

confidence: 99%

A Time-Varying Fiscal Reaction Function for Brazil

Campos

Cysne

2019

Estud. Econ.

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“…Liu, Waggoner, and Zha (2009) refer to the di¤erence in the dynamic responses under the model with naive vs. sophisticated consumers as the "expectation e¤ect." As explained by Davig and Leeper (2007), such expectation e¤ect generally plays an important role in the presence of autocorrelated disturbances, which is not the case of the monetary policy innovation we envisage. To provide some useful analytical insight we also set = 0, which corresponds to a case in which households consider the deviation of their consumption utility from the utility accruing from a constant consumption reference level.…”

Section: Some Qualitative Insightsmentioning

confidence: 92%

“…7 In the remainder, variables without time subscript denote the steady state value of their indexed counterparts. 1 8 Considering an endogenous mechanism of beliefs switching is likely to alter the way monetary policy is transmitted and how the Central Bank should respond to smooth ‡uctuations in real activity and prices (seeDavig and Leeper, 2008). Embedding such a mechanism in our model economy is an important development that…”

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Reference-Dependent Preferences and the Transmission of Monetary Policy

et al. 2010

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This paper proposes a novel explanation of the vast empirical evidence showing that output and prices react asymmetrically to monetary policy innovations over contractions and expansions in the business cycle. We use VAR techniques to show that monetary policy exerts stronger e¤ects on the U.S. GDP during contractionary phases, as compared to expansionary ones. As to prices, their response is not statistically di¤erent across di¤erent cyclical stages. We show that these facts are consistent with a New Neoclassical Synthesis model based on the assumption that households' utility partly depends on deviations of their consumption from a reference level below which aversion to loss is displayed. In line with the theory developed by Kahneman and Tversky (1979), losses in consumption utility loom larger than gains. This implies state-dependent degrees of real rigidity and elasticity of intertemporal substitution in consumption that generate competing e¤ects on the responses of output and in ‡ation following a monetary innovation. The key predictions of the model are in line with the data. We then explore the state-dependent trade-o¤ between in ‡ation and output stabilization that naturally arises in this context. Greater elasticity of in ‡ation to real activity during expansionary stages of the cycle promotes a stronger degree of policy activism in the response to the expected rate of in ‡ation under discretion, compared to what is otherwise prescribed during contractions.

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“…The paper is also related to the literature that focuses on solving endogenous regime-switching models. Davig and Leeper (2008), Davig et al (2010), and Alpanda and Ueberfeldt (2016) all consider endogenous regime-switching, but employ computationally costly global solution methods that hinder likelihood-based estimation. Lind (2014) develops a regime-switching perturbation approach for approximating non-linear models, but it requires repeatedly refining the points of approximation and hence it is not suitable for estimation purposes.…”

Section: Introductionmentioning

confidence: 99%

Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach

Benigno¹,

Foerster²,

Otrok³

et al. 2020

ERWP

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We estimate a workhorse DSGE model with an occasionally binding borrowing constraint. First, we propose a new specification of the occasionally binding constraint, where the transition between the unconstrained and constrained states is a stochastic function of the leverage level and the constraint multiplier. This specification maps into an endogenous regime-switching model. Second, we develop a general perturbation method for the solution of such a model. Third, we estimate the model with Bayesian methods to fit Mexico's business cycle and financial crisis history since 1981. The estimated model fits the data well, identifying three crisis episodes of varying duration and intensity: the Debt Crisis in the early-1980s, the Peso Crisis in the mid-1990s, and the Global Financial Crisis in the late-2000s. The crisis episodes generated by the estimated model display sluggish and long-lasting build-up and stagnation phases driven by plausible combinations of shocks. Different sets of shocks explain different variables over the business cycle and the three historical episodes of sudden stops identified.

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Endogenous Monetary Policy Regime Change

Cited by 35 publications

References 54 publications

A Time-Varying Fiscal Reaction Function for Brazil

A Time-Varying Fiscal Reaction Function for Brazil

Reference-Dependent Preferences and the Transmission of Monetary Policy

Estimating Macroeconomic Models of Financial Crises: An Endogenous Regime-Switching Approach

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