Published Papers 2009
Paper 2009-II-4
"Estimating a Taylor Rule with Markov Switching Regimes for Switzerland"
Alexander Perruchoud
Abstract: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.
Pages: 187-220
JEL classification: C22, E52, E58
Keywords: Taylor rule, Markov switching, Non-constant transition probabilities, Maximum likelihood, EM algorithm
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