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Can a Sunspot Driven Model Replicate Recognizable Business Cycles?


  • John D. Tsoukalas

    (University of Maryland and Bank of England)


This paper presents a dynamic stochastic general equilibrium model in which there is a small productive role for money. The equilibrium of the model is characterized by indeterminacy. This implies that the economy can display fluctuations at business cycle frequencies even in the absence of shocks to fundamentals. In the model, fluctuations are driven by changes in agents beliefs or \sunspots" that are orthogonal to fundamentals, i.e. preferences and technology. I examine a calibrated version of this model and find that it performs as well as the standard RBC model in matching the covariance properties of the U.S. data. More importantly, computing impulse response functions for a number of macroeconomic time series from the data, I find that it outperforms the RBC model in terms of capturing the cyclical dynamic properties of the U.S. data.

Suggested Citation

  • John D. Tsoukalas, 2004. "Can a Sunspot Driven Model Replicate Recognizable Business Cycles?," Ekonomia, Cyprus Economic Society and University of Cyprus, vol. 7(2), pages 89-120, Winter.
  • Handle: RePEc:ekn:ekonom:v:7:y:2004:i:2:p:89-120

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    More about this item

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money


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