Chapter 6 Indeterminacy and sunspots in macroeconomics

Jess Benhabib, Roger E.A. Farmer

    Research output: Contribution to journalReview article

    Abstract

    This chapter gives an overview of the recent literature on indeterminacy and sunspots in macroeconomics. It discusses of some of the conceptual and the technical aspects of this literature, and provides a simple framework for illustrating the mechanisms of various dynamic equilibrium models that give rise to indeterminate equilibria. The role of external effects, monopolistic competition, and increasing returns in generating indeterminacy is explored for one-sector and multi-sector models of real business cycles and of economic growth. Indeterminacy is also studied in monetary models, as well as in models where monetary and fiscal policy are endogenous and determined by feedback rules. Particular attention is paid to the empirical plausibility of these models and their parametrizations in generating indeterminate equilibria. An overview of calibrated macroeconomic models with sunspot equilibria is given, and their successes and shortcomings in matching properties of data are assessed. Finally some issues regarding the selection of equilibria, the observable implications, and difficulties of forecasting that arise in such models are briefly addressed.

    Original languageEnglish (US)
    Pages (from-to)387-448
    Number of pages62
    JournalHandbook of Macroeconomics
    Volume1
    Issue numberPART A
    DOIs
    StatePublished - 1999

    Keywords

    • indeterminacy
    • multiple equilibria
    • sunspots

    ASJC Scopus subject areas

    • Economics and Econometrics
    • Economics, Econometrics and Finance (miscellaneous)

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