News Shocks or Correlated Sunspots? An Observational Equivalence Result in Linear Rational Expectations Model
This 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.
|Date of creation:||09 May 2011|
|Date of revision:|
|Contact details of provider:|| Postal: Avenue de Beaulieu, 1160 Brussels|
Phone: +322 299 3523
Fax: +322 299 3523
Web page: http://www.eeri.eu/index.htm
More information through EDIRC
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.:
- Schmitt-Grohé, Stephanie & Uribe, Martín, 2009.
"What’s News in Business Cycles,"
CEPR Discussion Papers
7201, C.E.P.R. Discussion Papers.
- Fève, Patrick & Matheron, Julien & Sahuc, Jean-Guillaume, 2009. "On the dynamic implications of news shocks," Economics Letters, Elsevier, vol. 102(2), pages 96-98, February.
When requesting a correction, please mention this item's handle: RePEc:eei:rpaper:eeri_rp_2011_09. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julia van Hove)
If references are entirely missing, you can add them using this form.