Stable Finite-State Markov Sunspots
George Evans () and
Bruce McGough ()
University of Oregon Economics Department Working Papers from University of Oregon Economics Department
We consider a linear univariate rational expectations model, with a predetermined variable, and study existence and stability of solutions driven by an extraneous finite-state Markov process. We show that when the model is indeterminate there exists a new class of k-state dependent sunspot equilibria in addition to the k-state sunspot equilibria (k-SSEs) already known to exist in part of the indeterminacy region. The new type of equilibria, which we call ergodic k-SSEs, are driven by a finite-state sunspot but can have an infinite range of values even in the nonstochastic model. Stability under econometric learning is analyzed using representations that nest both types of equilibria. 2-SSEs and ergodic 2-SSEs are learnable for parameters in proper subsets of the regions of their existence. Our results extend to models with intrinsic random shocks.
Keywords: Markov sunspots; Learning; Indeterminacy; Expectational stability (search for similar items in EconPapers)
JEL-codes: C62 E32 D83 D84 (search for similar items in EconPapers)
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