Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/71901
Authors: 
Carravetta, Francesco
Sorge, Marco M.
Year of Publication: 
2011
Series/Report no.: 
Bonn Econ Discussion Papers 05/2011
Abstract: 
This paper describes a method for solving a class of forward-looking Markov-switching Rational Expectations models under noisy measurement, by specifying the unobservable expectations component as a general-measurable function of the observable states of the system, to be determined optimally via stochastic control and filtering theory. Solution existence is proved by setting this function to the regime-dependent feedback control minimizing the mean-square deviation of the equilibrium path from the corresponding perfect-foresight autoregressive Markov jump state motion. As the exact expression of the conditional (rational) expectations term is derived both in finite and infinite horizon model formulations, no (asymptotic) stationarity assumptions are needed to solve forward the system, for only initial values knowledge is required. A simple sufficient condition for the mean-square stability of the obtained rational expectations equilibrium is also provided.
Subjects: 
Rational Expectations
Markov-switching dynamic systems
Dynamic programming
Time-varying Kalman filter
JEL: 
C5
C61
C62
C63
Document Type: 
Working Paper

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