Computing Sunspots in Linear Rational Expectations Models
15 Pages Posted: 16 Dec 2001
Date Written: October 2001
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.
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