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Modeling Volcker as a non-absorbing state: agnostic identification of a Markov-switching VAR

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  • Michael T. Owyang
Abstract
Recently, models of monetary policy have been constructed to include structural breaks to account for changes in policymaker preferences or operating procedures. These models typically assume that when changes occur, they happen once and for all. In this paper, we allow the policymaker and the economy to switch freely between regimes. We find that not only does the nature and effect of innovations to monetary policy change, but switching the policy rule and the economy's subsequent response can in and of itself alter the path of the economy. We find the switch itself can generate disinflationary dynamics.

Suggested Citation

  • Michael T. Owyang, 2002. "Modeling Volcker as a non-absorbing state: agnostic identification of a Markov-switching VAR," Working Papers 2002-018, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2002-018
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    References listed on IDEAS

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    Cited by:

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    3. Kim, Chang-Jin & Piger, Jeremy & Startz, Richard, 2008. "Estimation of Markov regime-switching regression models with endogenous switching," Journal of Econometrics, Elsevier, vol. 143(2), pages 263-273, April.
    4. Neville Francis & Michael T. Owyang, 2004. "Monetary policy in a Markov-switching VECM: implications for the cost of disinflation and the price puzzle," Working Papers 2003-001, Federal Reserve Bank of St. Louis.

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    Monetary policy; Vector autoregression;

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