Endogenous Switching of Volatility Regimes: Rational Expectations and Behavioral Sunspots Gaetano Gaballo August 2, 2009 Abstract The importance of central bank communication policies and statistical learn- ing in expectations formation have been recently emphasized. The present work merges and innovates basic ideas from both approaches in two respects. Firstly, we analyse a Lucas-type monetary model where private sector expectations are inuenced by two, and not only one, institutional forecasters. Strategic motives takes place because the rational expectations equilibrium (REE) arises as solution of the simultaneous coordination game played by such big actors. Therefore, and this is a second novelty, both institutional forecasters have to learn not only about fundamentals but also about the rationality of the others expectations. We show that the use of constant gain learning algorithms by institutional forecasters can give rise to endogenous, unpredictable and persistent switches in volatility regimes. Specically, ination dynamics can suddenly switches from the unique REE to a behavioral sunspot equilibrium and viceversa. Keywords: expectations co-movements, excess volatility, adaptive learning, bounded rationality. Dipartimento di Economia Politica, Universit di Siena, P.za San Francesco, 7 - 53100 - Siena (Italy). Comments welcome at g.gaballo@unisi.it 1