We develop a Bayesian semi-parametric approach to the instrumental variable problem. We assume linear structural and reduced form equations, but model the error distributions non-parametrically. A Dirichlet process prior is used for the joint distribution of structural and instrumental variable...

We propose a generalization of the rational expectations framework to allow for multiplicative sunspot shocks and temporarily unstable paths. Then, we provide an econometric strategy to estimate this generalized model on the data. Our approach yields drifting parameters and stochastic...