ON THE EXPECTATIONAL STABILITY OF RATIONAL EXPECTATIONS EQUILIBRIA IN NEWS-SHOCK DSGE MODELS

Brian Dombeck

Macroeconomic Dynamics, 2022, vol. 26, issue 1, 102-126

Abstract: The expectational stability (E-stability) property of rational expectations equilibria (REE) in linear macroeconomic dynamic stochastic general equilibrium (DSGE) models is known to be sensitive to the information available to decision makers as well as the structure of the economic environment considered. Models featuring news shocks as a source of macroeconomic fluctuations depart from traditional assumptions regarding both the structure of the economy and the information set of agents. This paper investigates whether E-stability of REE is affected by either the inclusion of news shocks by themselves or the complementary structural changes. The main results find that the E-stability property of REE is robust to the inclusion (or exclusion) of news shocks and that well-known news-shock DSGE models permit REE which are simultaneously E-stable and capable of producing qualitatively realistic expectationally driven business cycles.

Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:26:y:2022:i:1:p:102-126_4

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