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On the Empirical Separability of News Shocks and Sunspots

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  • Marco M. Sorge

    (BGSE, University of Bonn)

Abstract

In this note we discuss the possibility of empirically evaluating the relative importance of different drivers of forecast errors in linear rational expectations frameworks, using the predictions generated by the theory. By means of a few simple examples, we show that, when accounting for indeterminate equilibria, empirical difficulties are likely to arise in distinguishing between determinate models driven by news shocks or rather by indeterminate ones under nonfundamental – or arbitrarily related to fundamentals – sunspot noise.

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Article provided by Faculdade de Economia, Universidade de Coimbra in its journal Notas Económicas.

Volume (Year): (2010)
Issue (Month): 32 (December)
Pages: 44-55

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Handle: RePEc:gmf:journl:y:2010:i:32:p:44-55

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  1. Andreas Beyer & Roger E. A. Farmer, 2007. "Testing for Indeterminacy: An Application to U.S. Monetary Policy: Comment," American Economic Review, American Economic Association, vol. 97(1), pages 524-529, March.
  2. Kamihigashi, Takashi, 1996. "Real business cycles and sunspot fluctuations are observationally equivalent," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 105-117, February.
  3. Chow, Gregory C., 1980. "Estimation of rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 241-255, May.
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  7. Eric M. Leeper & Todd B. Walker & Shu-Chun Susan Yang, 2008. "Fiscal Foresight: Analytics and Econometrics," NBER Working Papers 14028, National Bureau of Economic Research, Inc.
  8. Laurence Broze & Ariane Szafarz, 1991. "The Econometric Analysis of Non-Uniqueness in Rational Expectations Models," ULB Institutional Repository 2013/649, ULB -- Universite Libre de Bruxelles.
  9. Beaudry, Paul & Portier, Franck, 2003. "Stock Prices, News and Economic Fluctuations," CEPR Discussion Papers 3844, C.E.P.R. Discussion Papers.
  10. Hansen, Lars Peter & Sargent, Thomas J., 1980. "Formulating and estimating dynamic linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 7-46, May.
  11. Beaudry, Paul & Portier, Franck, 2001. "An Exploration into Pigou's Theory of Cycles," CEPR Discussion Papers 2996, C.E.P.R. Discussion Papers.
  12. Lilia Karnizova, 2007. "News versus Sunspot Shocks in Linear Rational Expectations Models," Working Papers 0706E, University of Ottawa, Department of Economics.
  13. Benhabib, Jess & Farmer, Roger E.A., 1999. "Indeterminacy and sunspots in macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 6, pages 387-448 Elsevier.
  14. Azariadis, Costas, 1981. "Self-fulfilling prophecies," Journal of Economic Theory, Elsevier, vol. 25(3), pages 380-396, December.
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  16. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  17. Lubik, Thomas A. & Schorfheide, Frank, 2003. "Computing sunspot equilibria in linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 28(2), pages 273-285, November.
  18. Gourieroux, C & Laffont, J J & Monfort, Alain, 1982. "Rational Expectations in Dynamic Linear Models: Analysis of the Solutions," Econometrica, Econometric Society, vol. 50(2), pages 409-25, March.
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Cited by:
  1. Sorge, Marco M., 2012. "News shocks or parametric indeterminacy? An observational equivalence result in linear rational expectations models," Economics Letters, Elsevier, vol. 114(2), pages 198-200.

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