Bayesian Analysis of DSGE Models with Regime Switching

Eo, Yunjong (2008): Bayesian Analysis of DSGE Models with Regime Switching.

Abstract

I estimate DSGE models with recurring regime changes in monetary policy (inflation target and reaction coefficients), technology (growth rate and volatility), and/or nominal price rigidities. In the models, agents are assumed to know deep parameter values but make probabilistic inference about prevailing and future regimes based on Bayes’ rule. I develop an estimation method that takes these probabilistic inferences into account when relating state variables to observed data. In an application to postwar U.S. data, I find stronger support for regime switching in monetary policy than in technology or nominal rigidities. In addition, a model with regime switching policy that conforms to the long-run Taylor principle given in Davig and Leeper (2007) is preferred to a determinacy-indeterminacy model motivated by Lubik and Schorfheide (2004). These empirical results indicate that, even though a passive policy regime produced more volatility in the economy from the early 1970s to the mid-1980s, the economy can be explained by determinacy over the entire postwar period, implying no role for sunspot shocks in explaining the changes in volatility.

• Item Type: MPRA Paper
• Language: English
• Keywords: New Keynesian DSGE; Markov-switching; Monetary Policy; Indeterminacy; Long-run Taylor Principle; Bayesian Analysis
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C52 - Model Evaluation, Validation, and Selection; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C11 - Bayesian Analysis: General

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