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Statistical sunspots

Author

Listed:
  • Branch, William A.

    (Department of Economics, University of California, Irvine)

  • McGough, Bruce

    (Department of Economics, University of Oregon)

  • Zhu, Mei

    (Shanghai University of Finance and Economics and Key Laboratory of Mathematical Economics (SUFE))

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.

Suggested Citation

  • Branch, William A. & McGough, Bruce & Zhu, Mei, 2022. "Statistical sunspots," Theoretical Economics, Econometric Society, vol. 17(1), January.
    • Handle: RePEc:the:publsh:3752
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    More about this item

    Keywords

    Adaptive learning; animal spirits; business cycles; optimal monetary policy;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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