Are Sunspots Stabilizing英文文献资料.docVIP

Theoretical Economics Letters, 2011, 1, 111-113 doi:10.4236/tel.2011.13023 Published Online November 2011 (http://www.SciRP.org/journal/tel) Are Sunspots Stabilizing? Paul Shea University of Kentucky, Lexington, USA E-mail: paul.shea@ Received August 18, 2011; revised October 4, 2011; accepted October 12, 2011 Abstract The reduced form solutions of indeterminate rational expectations models often include extraneous expecta- tional errors or “sunspots”. Sunspots are usually modeled as independent of the model’s fundamentals, and are often presumed to result in excess volatility. An alternate approach, however, is to assume that sunspots include both an overreaction or underreaction to fundamentals, as well as genuine extraneous noise. This paper uses a simple linear model to formally show how the relationship between sunspots and fundamentals affects aggregate volatility. Sunspots reduce volatility if 1) they include an undereaction to fundamentals, 2) the variance of genuine extraneous noise is sufficiently small, and 3) the root that causes indeterminacy is sufficiently far from one. Keywords: Sunspots, Indeterminacy, Volatility, 1. Introduction underreaction to fundamentals. Benhabib and Farmer (1999) [4] write that sunspots are of interest because they both add an additional source of volatility, and because they allow for richer propaga- tion dynamics. It follows from the former property that sunspots are typically destabilizing. In the Real Business Cycle (RBC) literature, sunspots are therefore often viewed as a mechanism for reducing the volatility of productivity shocks needed to match the volatility of output, and thus reducing the probability of productivity regressing. Most notably, Farmer and Guo (1994) [5] show that a RBC model that includes only sunspot shocks does arguably as well at matching the data as a It is well known that linear rational expectations models may be in