Computing Sunspots in Linear Rational Expectations Models

15 Pages Posted: 16 Dec 2001

See all articles by Thomas A. Lubik

Thomas A. Lubik

Johns Hopkins University - Department of Economics

Frank Schorfheide

University of Pennsylvania - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: October 2001

Abstract

We provide a computationally simple method of including and analyzing the effects of sunspot shocks in linear rational expectations models when the equilibrium is indeterminate. Under non uniqueness sunspots can affect model dynamics through endogenous forecast errors that do not completely adjust to fundamental shocks alone. We show that sunspot shocks can ire modeled as exogenous belief shocks which can be included in the set of fundament als. By means of a simple example we illustrate that the exact specification of the transmission mechanism of the belief shocks is irrelevant for the solution of the model.

Suggested Citation

Lubik, Thomas A. and Schorfheide, Frank, Computing Sunspots in Linear Rational Expectations Models (October 2001). PIER Working Paper No. 01-047. Available at SSRN: https://ssrn.com/abstract=293801 or http://dx.doi.org/10.2139/ssrn.293801

Thomas A. Lubik

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States

Frank Schorfheide (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

HOME PAGE: http://www.econ.upenn.edu/~schorf

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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