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ON THE EXPECTATIONAL STABILITY OF RATIONAL EXPECTATIONS EQUILIBRIA IN NEWS-SHOCK DSGE MODELS

Published online by Cambridge University Press:  14 April 2020

Brian Dombeck
Brian Dombeck*
Affiliation:
Lewis & Clark College
*
Address correspondence to: Brian Dombeck, Department of Economics, Lewis & Clark College, 0615 SW Palatine Hill Road, MSC 40, Portland, OR, 97219, USA. e-mail: bdombeck@lclark.edu. Phone: 503-768-7643.
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Abstract

The expectational stability (E-stability) property of rational expectations equilibria (REE) in linear macroeconomic dynamic stochastic general equilibrium (DSGE) models is known to be sensitive to the information available to decision makers as well as the structure of the economic environment considered. Models featuring news shocks as a source of macroeconomic fluctuations depart from traditional assumptions regarding both the structure of the economy and the information set of agents. This paper investigates whether E-stability of REE is affected by either the inclusion of news shocks by themselves or the complementary structural changes. The main results find that the E-stability property of REE is robust to the inclusion (or exclusion) of news shocks and that well-known news-shock DSGE models permit REE which are simultaneously E-stable and capable of producing qualitatively realistic expectationally driven business cycles.

Keywords

News shocksBounded rationalityAdaptive learningDynamic stochastic general equilibrium models
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 1 , January 2022 , pp. 102 - 126
Copyright
© Cambridge University Press 2020

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Footnotes

This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors. I am extremely grateful for the feedback of two anonymous referees as well as Franck Portier and for the support and guidance of Bruce McGough, George Evans, Jeremy Piger, and David Evans as well as helpful suggestions from participants in the University of Oregon’s Macroeconomics Group.

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