Computing sunspot equilibria in linear rational expectations models

✍ Scribed by Thomas A. Lubik; Frank Schorfheide

• Publisher: Elsevier Science
• Year: 2003
• Tongue: English
• Weight: 311 KB
• Volume: 28
• Category: Article
• ISSN: 0165-1889
• DOI: 10.1016/s0165-1889(02)00153-7

✦ Synopsis

We provide a computationally simple method of analyzing the e ects of fundamental and sunspot shocks in linear rational expectations models when the equilibrium is indeterminate. Under indeterminacy sunspots can a ect model dynamics through endogenous forecast errors. Moreover, the e ect of fundamental shocks on forecast errors is not uniquely determined. The solution method is illustrated with a New Keynesian dynamic stochastic equilibrium model that can be solved analytically. Under a passive interest-rate rule, the response of in ation to an unanticipated interest rate cut is ambiguous: there are some equilibria in which in ation increases and others in which prices fall.