Bayesian analysis of DSGE models with regime switching

I estimate DSGE models with recurring regime changes in monetary policy (inflation target and reaction coefficients), technology (growth rate and volatil-ity), and/or nominal price rigidities. In the models, agents are assumed to know deep parameter values but make probabilistic inference about prevailing and future regimes based on Bayes ’ rule. I develop an estimation method that takes these probabilistic inferences into account when relating state variables to observed data. In an application to postwar U.S. data, I find stronger support for regime switching in monetary policy than in technology or nominal rigidi-ties. These empirical results indicate that a passive policy regime produced more volatility in the economy from the early 1970s to the mid-1980s and an active policy induces the Great Moderation