Sophocles Mavroeidis
(Oxford University)
will give a presentation on
Endogenous Regime Switching
Abstract: We examine the theory and practical implementation of Endogenous Regime Switching models, where the economic regime is driven by endogenous factors, rather than external shocks as in Markov-switching frameworks. Drawing on the work of Gourieroux Laffont & Monfort (1980), we explore cases where economic variables, such as interest rates, cross key thresholds, triggering significant policy shifts. The "zero lower bound" (ZLB) on nominal interest rates, as explored by Mavroeidis (2021), serves as a leading example, demonstrating the nonlinearity that emerges when policy constraints bind. Other applications include tipping points related to financial instability, public debt sustainability, and housing leverage thresholds. Theoretical challenges include ensuring model coherency (Mavroeidis, 2021), identifying structural shocks (Ikeda et al, 2024; Duffy & Mavroeidis, 2024), stationarity concerns, and the role of trends and cointegration (Duffy Mavroeidis & Wycherley, 2023, 2024). Moreover, the presence of latent variables like shadow rates (Wu & Xia, 2016) and natural rates (Holston Laubach & Williams, 2017, 2023), complicates model estimation. The practical aspects of filtering and estimating latent variables, especially shadow rates, will be discussed in relation to the EndoRSE project (Bonomolo, Kabel and Mavroeidis, 2024)—a new toolkit for implementing endogenous regime-switching models in practice.