TY - JOUR
T1 - Walk on the wild side
T2 - Temporarily unstable paths and multiplicative sunspots
AU - Ascari, Guido
AU - Bonomolo, Paolo
AU - Lopes, Hedibert F.
N1 - Funding Information:
* Ascari: Department of Economics, University of Oxford, Manor Road, Oxford OX1 3UQ, UK, and University of Pavia and Bank of Finland (email: guido.ascari@economics.ox.ac.uk); Bonomolo: Economics and Research Division, De Nederlandsche Bank, Postbus 98, 1000 AB Amsterdam, The Netherlands (email: p.bonomolo@dnb. nl); Lopes: INSPER - Institute of Education and Research, Quatá Street, 300 - Vila Olímpia, São Paulo - SP, 04546-042, Brasil (email: hedibertfl@insper.edu). Mark Aguiar was the coeditor for this article. We thank two anonymous referees, Philippe Andrade, Paul Beaudry, Fabio Canova, Efrem Castelnuovo, John Cochrane, Andrea Colciago, Jakob de Haan, Ard Den Reijer, Martin Ellison, Stefano Eusepi, Luca Fanelli, Jésus Fernández-Villaverde, Andrea Ferrero, Gaetano Gaballo, Valentina Gavazza, Tom Holden, Alejandro Justiniano, Jesper Lindé, Albert Marcet, Michael McMahon, Leonardo Melosi, Giorgio Primiceri, Davide Raggi, Neil Rankin, Pietro Rigo, Lorenza Rossi, Luca Sala, Thomas Sargent, Paolo Surico, conference participants at the SED 2012 in Limassol, the CEF 2016, the NBER Summer Institute 2016, the Cleveland Fed Inflation Conference 2016, the Learning Conference Expectations in Dynamic Macroeconomic Models 2016 in Amsterdam, the Workshop on Nonlinear Models in Macroeconomics and Finance for an Unstable World in Oslo 2018, and participants in many seminars for helpful comments on earlier versions. Bonomolo benefited from visiting the Research Division of Sveriges Riksbank. Lopes acknowledges partial financial support at various stages of this project to INSPER, as well as the Brazilian research financial agencies CNPq and FAPESP. Preliminary versions of this paper were circulated under the titles “Does Inflation Walk on Unstable Paths?” and “Rational Sunspots.” The views expressed are those of the authors and do not necessarily reflect official positions of De Nederlandsche Bank. The authors declare that they have no relevant or material financial interests that relate to the research described in this paper.
Publisher Copyright:
© 2019 American Economic Association.
PY - 2019/5
Y1 - 2019/5
N2 - 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 in?ation 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 stag?ation period in the 1970s.
AB - 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 in?ation 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 stag?ation period in the 1970s.
UR - http://www.scopus.com/inward/record.url?scp=85067090159&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85067090159&partnerID=8YFLogxK
U2 - 10.1257/aer.20160576
DO - 10.1257/aer.20160576
M3 - Article
AN - SCOPUS:85067090159
SN - 0002-8282
VL - 109
SP - 1805
EP - 1842
JO - American Economic Review
JF - American Economic Review
IS - 5
ER -