Walk on the Wild Side: Temporarily Unstable Paths and Multiplicative Sunspots

• 成果类型: Article
• 署名作者: Ascari, Guido; Bonomolo, Paolo; Lopes, Hedibert F.
• 署名单位: University of Oxford; University of Pavia; Bank of Finland; European Central Bank; De Nederlandsche Bank NV; Insper
• 刊物名称: AMERICAN ECONOMIC REVIEW
• ISSN/ISSBN: 0002-8282
• DOI: 10.1257/aer.20160576
• 发表日期: 2019
• 页码: 1805-1842
• 关键词: monetary-policy; rational-expectations; indeterminacy; simulation

摘要

We propose a generalization of the rational expectations framework to allow for temporarily unstable paths. Our approach introduces multiplicative sunspot shocks and it yields drifting parameters and stochastic volatility. Then, we provide an econometric strategy to estimate this generalized model on the data. The methodology allows the data to choose between different possible alternatives: determinacy, indeterminacy, and temporary instability. We apply our methodology to US inflation dynamics in the 1970s through the lens of a simple New Keynesian model. When temporarily unstable paths are allowed, the data unambiguously select them to explain the stagflation period in the 1970s.