Sunspots in economic models can lead to unpredictable inflation outcomes.
The article presents simple methods for analyzing the effects of fundamental and sunspot shocks in economic models with uncertain outcomes. Sunspots can influence model dynamics by causing forecast errors that don't fully adjust to fundamental shocks alone. The study shows that different equilibria can result from the same shocks, and some solution methods may not capture all possible outcomes. Using a specific economic model, the researchers demonstrate that under certain conditions, an unexpected interest rate cut can lead to conflicting effects on output and inflation.