We argue that dynamic indeterminacy in structural models can help rationalize statistical regularities regarding higher-order properties of macroeconomic time series. Without departing from the Gaussian rational expectations paradigm, we formally establish that any indeterminate equilibrium model admits a linear recursion with multiplicative noise representation. This allows self-fulfilling expectations (sunspots) to enhance endogenous propagation forces that trigger high-probability extreme changes in model variables, while also inducing time variation in conditional volatilities. As a result, even modest, short-lived exogenous shocks can produce large and persistent macroeconomic effects. Using a workhorse New Keynesian framework, we investigate the ability of such a general mechanism to account for observed fat-tailed behavior and volatility clusters in the inflation series over the Great Inflation period of US macroeconomic history.

Equilibrium indeterminacy and sunspot tales

Sorge, Marco M.
2021-01-01

Abstract

We argue that dynamic indeterminacy in structural models can help rationalize statistical regularities regarding higher-order properties of macroeconomic time series. Without departing from the Gaussian rational expectations paradigm, we formally establish that any indeterminate equilibrium model admits a linear recursion with multiplicative noise representation. This allows self-fulfilling expectations (sunspots) to enhance endogenous propagation forces that trigger high-probability extreme changes in model variables, while also inducing time variation in conditional volatilities. As a result, even modest, short-lived exogenous shocks can produce large and persistent macroeconomic effects. Using a workhorse New Keynesian framework, we investigate the ability of such a general mechanism to account for observed fat-tailed behavior and volatility clusters in the inflation series over the Great Inflation period of US macroeconomic history.
File in questo prodotto:
Non ci sono file associati a questo prodotto.

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11386/4770740
 Attenzione

Attenzione! I dati visualizzati non sono stati sottoposti a validazione da parte dell'ateneo

Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus 3
  • ???jsp.display-item.citation.isi??? 3
social impact