Ano: 2016

Código: WPE – 366

Autores/Pesquisadores:

• Guido Ascari

• Paolo Bonomolo

• Hedibert F. Lopes

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 di§erent possible alternatives: determinacy, indeterminacy and instability. We apply our methodology to US ináation dynamics in the í70s through the lens of a simple New Keynesian model. When unstable RE paths are allowed, the data unambiguously select them to explain the stagáation period in the ë70s. Thus, our methodology suggests that US ináation dynamics in the í70s is better described by unstable rational equilibrium paths.

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