Monetary and fiscal policy switching with time-varying volatilities

•We extend the ongoing literature on regime change.•We allow time variation in disturbance variances of regime-switching policy rules.•We achieve superior modeling with quarterly US data.•We find that passive monetary has stronger ARCH effects than active monetary policy.

This paper extends the ongoing literature on regime change. The extension allows time variation in disturbance variances of interest rate rules for monetary policy and tax rules for fiscal policy that switch stochastically between two regimes. We achieve superior modelings of monetary and fiscal policy rules with quarterly US data.