Template-Type: ReDIF-Paper 1.0
Author-Name:  Guido Ascari
Author-Name-First: Guido
Author-Name-Last: Ascari
Author-Name:  Paolo Bonomolo
Author-Name-First: Paolo
Author-Name-Last: Bonomolo
Author-Name:  Hedibert F. Lopes
Author-Name-First: Hedibert F.
Author-Name-Last: Lopes
Title: Rational Sunspots
Abstract:  The instability of macroeconomic variables is usually ruled out by rational expectations. We propose a generalization of the rational expectations framework to estimate possible temporary unstable paths. Our approach yields drifting parameters and stochastic volatility. The methodology allows the data to choose between diferent possible alternatives: determinacy, indeterminacy and instability. We apply our methodology to US inflation dynamics in the '70s through the lens of a simple New Keynesian model. When unstable RE paths are allowed, the data unambiguously select them to explain the stagflation period in the '70s. Thus, our methodology suggests that US inflation dynamics in the '70s is better described by unstable rational equilibrium paths.
Length:  52 pages
Creation-Date:  2016
Order-URL: https://repositorio.insper.edu.br/handle/11224/5974
File-URL: https://repositorio.insper.edu.br/handle/11224/5974
File-Format: text/html
File-Function: Full text
Number: 226
Handle: RePEc:aap:wpaper:226