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Equilibrium Indeterminacy and Extreme Outcomes

19 Jul 2020

Competing explanations for the fat-tailed empirical distribution of aggregate time series range from exogenous stochastic volatility, boundedly rational agents reáecting a lot of structural change or that exogenous structural shocks are themselves extreme. We build on this literature and show that sunspots in dynamic models can accumulate as linear recursions with multiplicative noise. Thus, using known results from the large deviations literature allows us to conclude that even small sunspot shocks can lead to large movements in endogenous variables. We apply these results to models that admit indeterminacies to investigate the empirical relevance of sunspots in accounting for observed fat-tails in output.
economics science and technology mathematical analysis mathematics matrices philosophy physics forecasting expectations stability dsge normal distribution variance matrix (mathematics) dynamic stochastic general equilibrium expected value eigenvalues and eigenvectors eigenvalues dsge models rank eigendecomposition of a matrix generalized eigenvalues stability theory expectation operator

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Pages
41
Published in
Edmonton, AB, CA

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