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Expectational Stability of Resonant Frequency Sunspot Equilibria

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  • George W. Evans
  • Seppo Honkapohja

Abstract

We consider the stability under adaptive learning of the complete set of solutions to the model when . In addition to the fundamentals solution, the literature describes both finite-state Markov sunspot solutions, satisfying a resonant frequency condition, and autoregressive solutions depending on an arbitrary martingale difference sequence. We clarify the relationships between these solutions and show that the stability properties of equilibria may depend crucially on the representation used by agents in the learning process. Only the finite-state Markov sunspot solutions can be stable under learning.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2001/wp-cesifo-2001-06/cesifo_wp497.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 497.

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Date of creation: 2001
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Handle: RePEc:ces:ceswps:_497

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Related research

Keywords: Indeterminacy; representations of solutions; learnability; expectational stability; endogenous fluctuations;

References

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  1. Woodford, Michael, 1986. "Learning to Believe in Sunspots," Working Papers, C.V. Starr Center for Applied Economics, New York University 86-16, C.V. Starr Center for Applied Economics, New York University.
  2. Evans, George W., 1989. "The fragility of sunspots and bubbles," Journal of Monetary Economics, Elsevier, Elsevier, vol. 23(2), pages 297-317, March.
  3. Gourieroux, C & Laffont, J J & Monfort, Alain, 1982. "Rational Expectations in Dynamic Linear Models: Analysis of the Solutions," Econometrica, Econometric Society, Econometric Society, vol. 50(2), pages 409-25, March.
  4. G. Desgranges & G. Negroni, 2001. "Expectations Coordination on a Sunspot Equilibrium: an Eductive Approach," THEMA Working Papers, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise 2001-13, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  5. Evans, George & Honkapohja, Seppo, 1986. "A Complete Characterization of ARMA Solutions to Linear Rational Expectations Models," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 53(2), pages 227-39, April.
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Cited by:
  1. Honkapohja, Seppo & Mitra, Kaushik, 2004. "Are non-fundamental equilibria learnable in models of monetary policy?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(8), pages 1743-1770, November.
  2. George W. Evans & Seppo Honkapohja & Ramon Marimon, 2003. "Stable Sunspot Equilibria in a Cash-in-Advance Economy," Working Papers 14, Barcelona Graduate School of Economics.

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