Stable Finite-State Markov Sunspots

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Title: Stable Finite-State Markov Sunspots
Author: Evans, George W., 1949-; McGough, Bruce
Abstract: We consider a linear univariate rational expectations model, with a predetermined variable, and study existence and stability of solutions driven by an extraneous finite-state Markov process. We show that when the model is indeterminate there exists a new class of kstate dependent sunspot equilibria in addition to the k-state sunspot equilibria (k-SSEs) already known to exist in part of the indeterminacy region. The new type of equilibria, which we call ergodic k-SSEs, are driven by a finite-state sunspot but can have an infinite range of values even in the nonstochastic model. Stability under econometric learning is analyzed using representations that nest both types of equilibria. 2-SSEs and ergodic 2-SSEs are learnable for parameters in proper subsets of the regions of their existence. Our results extend to models with intrinsic random shocks.
Description: 45 p. Revision of: Stable noisy K-state Markov Sunspots.
Date: 2006-10-09

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