Working Paper

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

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.

Keywords: Monetary policy; Vector autoregression;

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2002

Number: 2002-018