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Sunspot-driven fat tails: A note

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  • Dave, Chetan
  • Sorge, Marco M.

Abstract

Empirical growth-rate distributions of major macroeconomic aggregates are typically non-Normal and exhibit fat tails. We advance the idea that indeterminacies in standard rational expectations models can qualify as a source of high-frequency extreme macroeconomic outcomes. In a univariate setup, we demonstrate the emergence of fat-tailed behavior for an endogenous variable even though structural and sunspot shocks both follow Normal distributions.

Suggested Citation

  • Dave, Chetan & Sorge, Marco M., 2020. "Sunspot-driven fat tails: A note," Economics Letters, Elsevier, vol. 193(C).
    • Handle: RePEc:eee:ecolet:v:193:y:2020:i:c:s0165176520302032
    DOI: 10.1016/j.econlet.2020.109304
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    References listed on IDEAS

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    Cited by:

    1. Chetan Dave & Scott J. Dressler & Samreen Malik, 2022. "A Cautionary Tale of Fat Tails," Villanova School of Business Department of Economics and Statistics Working Paper Series 53, Villanova School of Business Department of Economics and Statistics.
    2. Dave, Chetan & Sorge, Marco, 2020. "Equilibrium Indeterminacy and Extreme Outcomes: A Fat Sunspot Ta(i)l(e)," Working Papers 2020-12, University of Alberta, Department of Economics.
    3. Christian Di Pietro & Mariafortuna Pietroluongo & Marco M. Sorge, 2023. "Stochastic Ordering of Stationary Distributions of Linear Recurrences: Further Results and Economic Applications," Economies, MDPI, vol. 11(4), pages 1-10, April.
    4. Dave, Chetan & Sorge, Marco M., 2021. "Equilibrium indeterminacy and sunspot tales," European Economic Review, Elsevier, vol. 140(C).
    5. Sorge, Marco M., 2021. "Stabilizing Taylor rules and determinacy under unit root supply shocks: A re-examination," Journal of Macroeconomics, Elsevier, vol. 68(C).
    6. Dave, Chetan & Sorge, Marco, 2023. "Fat Tailed DSGE Models: A Survey and New Results," Working Papers 2023-3, University of Alberta, Department of Economics.

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    More about this item

    Keywords

    DSGE; Indeterminacy; Sunspot shocks; Fat tails;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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