A General and Efficient Method for Solving Regime-Switching DSGE Models

This paper provides a general representation of endogenous and threshold-based regime-switching models while also developing an efficient numerical solution method. Regime-switching occurs endogenously when certain variables cross threshold conditions that can themselves be regime-dependent. We illustrate our approach using a RBC model with state-dependent government spending policies. It is shown that regime-switching models involve strong non linearities and discontinuities in the dynamics of the model. However, our numerical solution which relies on simulation and projection methods with regime-dependent policy rules, proves to be accurate and sufficiently fast address these challenging aspects. Several also explore several alternative specifications for the model and the method.