Statistical sunspots

William A. Branch (), Bruce McGough () and Mei Zhu ()
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William A. Branch: Department of Economics, University of California, Irvine
Bruce McGough: Department of Economics, University of Oregon
Mei Zhu: Shanghai University of Finance and Economics and Key Laboratory of Mathematical Economics (SUFE)

Theoretical Economics, 2022, vol. 17, issue 1

Abstract: This paper shows that belief-driven economic fluctuations are a general feature of many determinate macroeconomic models. In environments with hidden state variables, forecast-model misspecification can break the link between indeterminacy and sunspots by establishing the existence of ``statistical sunspots'' in models that have a unique rational expectations equilibrium. To form expectations, agents regress on a set of observables that can include serially correlated non-fundamental factors (e.g. sunspots, judgment, expectations shocks, etc.). In equilibrium, agents attribute, in a self-fulfilling way, some of the serial correlation observed in data to extrinsic noise, i.e. statistical sunspots. This leads to sunspot equilibria in models with a unique rational expectations equilibrium. Unlike many rational sunspots, these equilibria are found to be generically stable under learning. Applications are developed in the context of a New Keynesian and an asset-pricing model.

Keywords: Adaptive learning; animal spirits; business cycles; optimal monetary policy (search for similar items in EconPapers)
JEL-codes: D82 D83 E40 E50 (search for similar items in EconPapers)
Date: 2022-01-20
References: View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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