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The authors develop a new method for computing Minimal State Variable solutions (MSV) to Markovswitching rational expectations models. They provide an algorithm to compute an MSV solution and show how to test a given solution for uniqueness and boundedness. They construct an example that is calibrated to U.S. data and show that the MSV solution in the example is unique. This solution can potentially explain in three different ways the observed reduction in the variance of inflation and the interest rate after 1980: The policy rule might have changed, the variance of the fundamental shocks might have fallen, or the private sector equations might have been different across regimes.
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