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Sunspots in a Cash-in-Advance Model: A Quantitative Assessment

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Author Info
David R. Stockman () (Department of Economics, University of Delaware)

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Abstract

Does consideration of sunspot equilibria in the cash-in-advance model help the model match key features in the US macroeconomic data? One can use the cash-in-advance model to generate predictions of macro time series via an equilibrium of the model. However, when restricted to minimum state variable stationary rational expectations equilibria, the model's predictions do not match the data well. Recent work by Woodford (1994) and Huo (1995) demonstrates that this model may exhibit a much larger class of equilibria including stationary and non-stationary sunspot equilibria. Does expanding the predictive content of the CIA model by considering this larger set of equilibria help the model match the US data? In this paper, the sunspot equilibria of Woodford (1994) and Huo (1995) are quantitatively explored to answer this question.

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File URL: http://www.lerner.udel.edu/economics/WorkingPapers/2003/UDWP2003-12.pdf
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Publisher Info
Paper provided by University of Delaware, Department of Economics in its series Working Papers with number 03-12.

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Length: 38 pages
Date of creation: 2003
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Publication status: Published in Journal of Macroeconomics, Vol. 29, pp. 123-144, 2007.
Handle: RePEc:dlw:wpaper:03-12

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Postal: Purnell Hall, Newark, Delaware 19716
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Web page: http://www.lerner.udel.edu/departments/economics/
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Related research
Keywords: dynamics; cash-in-advance; sunspots.;

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Find related papers by JEL classification:
C68 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computable General Equilibrium Models
E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical

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  1. Hodrick, Robert J & Kocherlakota, Narayana R & Lucas, Deborah, 1991. "The Variability of Velocity in Cash-in-Advance Models," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 358-84, April. [Downloadable!] (restricted)
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  2. Uhlig, H., 1995. "A toolkit for analyzing nonlinear dynamic stochastic models easily," Discussion Paper 97, Tilburg University, Center for Economic Research. [Downloadable!]
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  3. Huo, Teh-Ming, 1995. "Stationary sunspot equilibrium in a cash-in-advance economy," Journal of Economic Dynamics and Control, Elsevier, vol. 19(4), pages 831-843, May. [Downloadable!] (restricted)
  4. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, vol. 4(3), pages 345-80.
  5. Lucas, Robert E, Jr & Stokey, Nancy L, 1987. "Money and Interest in a Cash-in-Advance Economy," Econometrica, Econometric Society, vol. 55(3), pages 491-513, May. [Downloadable!] (restricted)
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