J. Benhabib and R. Farmer, “Indeterminacy and Sunspots in Macroeconomics,” In: J. Taylor and M. Woodford, Eds., The Handbook of Macroeconomics, North Holland, Am- sterdam, 1999.

has been cited by the following article:

• TITLE: Are Sunspots Stabilizing?

  AUTHORS: Paul Shea

  KEYWORDS: Sunspots, Indeterminacy, Volatility

  JOURNAL NAME: Theoretical Economics Letters, Vol.1 No.3, November 7, 2011

  ABSTRACT: The reduced form solutions of indeterminate rational expectations models often include extraneous expectational errors or “sunspots”. Sunspots are usually modeled as independent of the model’s fundamentals, and are often presumed to result in excess volatility. An alternate approach, however, is to assume that sunspots include both an overreaction or underreaction to fundamentals, as well as genuine extraneous noise. This paper uses a simple linear model to formally show how the relationship between sunspots and fundamentals affects aggregate volatility. Sunspots reduce volatility if 1) they include an undereaction to fundamentals, 2) the variance of genuine extraneous noise is sufficiently small, and 3) the root that causes indeterminacy is sufficiently far from one.