[Journal:] Swiss Journal of Economics and Statistics [ISSN:] 2235-6282 [Volume:] 145 [Year:] 2009 [Issue:] 2 [Pages:] 187-220
In this paper a Taylor rule including the exchange rate gap is estimated for Switzerland under the assumption that the parameters depend on two states governed by a Markov switching process. The estimates suggest the presence of an ordinary and an aggressive regime. The former is characterized by a high degree of interest rate smoothing and by significant reactions to inflation and the output gap. The aggressive regime shows much less smoothing, an aggressive reaction to inflation, and a large coefficient on the exchange rate gap. Furthermore, an asymmetry in the occurrence of the two regimes is found.
Taylor rule Markov switching Non-constant transition probabilities Maximum likelihood EM algorithm