News Shocks or Correlated Sunspots? An Observational Equivalence Result in Linear Rational Expectations Model
AbstractThis paper studies identification of linear rational expectations models under news shocks. Exploiting the general martingale difference solution approach, we show that news shocks models are observationally equivalent to a class of indeterminate equilibrium frameworks which are subject only, though arbitrarily, to i.i.d. fundamental shocks. The equivalent models are characterized by a lagged expectations structure, which arises typically when choice variables are predetermined or rather based on past information with respect to current observables. This particular feature creates room for serially correlated sunspot variables to arise in equilibrium reduced forms, whose dynamics can be equivalently induced by news shocks processes. This finding, which is inherent to the rational expectations theoretical construct, calls for carefully designing empirical investigations of news shocks in estimated DSGE models.
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Bibliographic InfoPaper provided by Economics and Econometrics Research Institute (EERI), Brussels in its series EERI Research Paper Series with number EERI_RP_2011_09.
Date of creation: 09 May 2011
Date of revision:
Rational expectations; News shocks; Indeterminacy; Observational equivalence.;
Find related papers by JEL classification:
- C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
- E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-06-11 (All new papers)
- NEP-CBA-2011-06-11 (Central Banking)
- NEP-ECM-2011-06-11 (Econometrics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fève, Patrick & Matheron, Julien & Sahuc, Jean-Guillaume, 2009. "On the dynamic implications of news shocks," Economics Letters, Elsevier, Elsevier, vol. 102(2), pages 96-98, February.
- Stephanie Schmitt-Grohe & Martin Uribe, 2008.
"What's News in Business Cycles,"
NBER Working Papers
14215, National Bureau of Economic Research, Inc.
- Schmitt-Grohé, Stephanie & Uribe, Martín, 2009. "What’s News in Business Cycles," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7201, C.E.P.R. Discussion Papers.
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