Policy Regimes Are Balance-Sheet States, Not Discretionary Switches
“Using a Markov-switching reaction function and logit bridge, we show that the probability of an ‘active’ Fed regime rises systematically with total-debt-to-GDP (Ω). Policy regime is not independent; it’s a balance-sheet state.”
“Using a Markov-switching reaction function and logit bridge, we show that the probability of an ‘active’ Fed regime rises systematically with total-debt-to-GDP (Ω). Policy regime is not independent; it’s a balance-sheet state.”
Logic (what we tested)
Main specification (Logit on Active indicator)
The Markov model’s “regime switches” are not free policy choices; they are balance-sheet phases. Rising Ω (claim load) statistically raises the probability we observe the active reaction-function state.
Scope: This establishes state-contingency, not a one-variable monocause. DSR and profitability also matter, consistent with a cash-flow feasibility view of policy.
Table X. Logit Regression — Determinants of “Active” Policy Regime Probability
Across specifications, the probability increases systematically with Ω, implying that policy stance is endogenously determined by debt saturation rather than exogenously chosen.
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