Persistent dynamics in (in)determinate equilibrium rational expectations models
by Marco Maria Sorge
International Journal of Computational Economics and Econometrics (IJCEE), Vol. 11, No. 1, 2021

Abstract: Equilibrium indeterminacy in rational expectations models is often claimed to produce higher time series persistence relative to determinacy. Proceeding by means of a simple linear stochastic model, I formally show that, for reasonable parameter configurations, there exists an uncountable (continuously infinite) set of indeterminate equilibria in low-order AR(MA) representation, which exhibit strictly lower persistence than their determinate counterpart. Implications for empirical studies concerned with, e.g., testing for indeterminacy and macroeconomic forecasting are discussed.

Online publication date: Fri, 11-Dec-2020

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