Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153775
Authors: 
Amisano, Gianni
Tristani, Oreste
Year of Publication: 
2011
Series/Report no.: 
ECB Working Paper 1341
Abstract: 
Phenomena such as the Great Moderation have increased the attention of macro-economists towards models where shock processes are not (log-)normal. This paper studies a class of discrete-time rational expectations models where the variance of exogenous innovations is subject to stochastic regime shifts. We first show that, up to a second-order approximation using perturbation methods, regime switching in the variances has an impact only on the intercept coefficients of the decision rules. We then demonstrate how to derive the exact model likelihood for the second-order approximation of the solution when there are as many shocks as observable variables. We illustrate the applicability of the proposed solution and estimation methods in the case of a small DSGE model.
Subjects: 
DSGE Models
Regime switching
second-order approximation
time-varying volatility
JEL: 
E0
C63
Document Type: 
Working Paper

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