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estimation of the model with tworegimes of the monetary policy

Topics: Models
Jun 10, 2015 at 7:30 AM
I have a linear model of a country that changes its monetary policy: before a time T it follows a standard Taylor rule (inflation targeting), and have its own currency. At time T country switches to euro, definitely looses its own monetary policy and its baseline IR is identical with the ECB rate.
Is there any way how to estimate this model?
Thanks for any help / recommendations.
Jun 11, 2015 at 5:44 AM
Interesting idea but not really that simple, at least not if you want to adhere to rational expectations. Certainly seems tricky to do if you want the transition to be anticipated.

If you don't care if the transition is anticipated then you could use two different models with common latent states and parameters, construct your own likelihood function based on this scenario using sequential calls to model.filter(), etc. But I've never tried this.