Statistical sunspots

Abstract

This paper shows that belief‐driven economic fluctuations are a general feature of many determinate macroeconomic models. In environments with hidden state variables, forecast‐model misspecification can break the link between indeterminacy and sunspots by establishing the existence of “statistical sunspots” in models that have a unique rational expectations equilibrium. To form expectations, agents regress on a set of observables that can include serially correlated nonfundamental factors (e.g., sunspots, judgment, expectations shocks, etc.). In equilibrium, agents attribute, in a self‐fulfilling way, some of the serial correlation observed in data to extrinsic noise, i.e., statistical sunspots. This leads to sunspot equilibria in models with a unique rational expectations equilibrium. Unlike many rational sunspots, these equilibria are found to be generically stable under learning. Applications are developed in the context of a New Keynesian and an asset‐pricing model.