Persistent dynamics in (in)determinate equilibrium rational expectations models

Marco Sorge

International Journal of Computational Economics and Econometrics, 2021, vol. 11, issue 1, 1-11

Abstract: Equilibrium indeterminacy in rational expectations models is often claimed to produce higher time series persistence relative to determinacy. Proceeding by means of a simple linear stochastic model, I formally show that, for reasonable parameter configurations, there exists an uncountable (continuously infinite) set of indeterminate equilibria in low-order AR(MA) representation, which exhibit strictly lower persistence than their determinate counterpart. Implications for empirical studies concerned with, e.g., testing for indeterminacy and macroeconomic forecasting are discussed.

Keywords: rational expectations; indeterminacy; persistence. (search for similar items in EconPapers)
Date: 2021
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