Exchange Rates, Monetary Policy Regimes, and Beliefs

In any given period agents cannot directly observe the policy regime, but instead form beliefs that are updated via Bayesian learning. As a result, expectation adjustment displays inertia that adds persistence to the effects of monetary shocks. Monetary policy process for the U.S. and an aggregate of OECD countries are estimated using Hamilton's Markov-switching model. The authors then solve and calibrate a version of the model and examine its quantitative properties.