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Indeterminacy and the Stability Puzzle in Non-Convex Economies

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  • George W. Evans

    ()
    (University of Oregon Economics Department)

  • Bruce McGough

    (Oregon State University Economics Department)

Abstract

We extend common factor analysis to a multi-dimensional setting by considering a bivariate reduced form consistent with many Real Business Cycle type models. We show how to obtain new representations of sunspots and find that there are parameter regions in which these sunspots are stable under learning. However, once the parameters are restricted to coincide with those generated by certain standard models of indeterminacy, we find, under one information assumption, that no stable sunspots exist, and under another information assumption, that they exist only for a very small part of the indeterminacy region. This leads to the following puzzle: why does indeterminacy almost always imply instability in RBC-type models?

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Bibliographic Info

Paper provided by University of Oregon Economics Department in its series University of Oregon Economics Department Working Papers with number 2002-14.

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Length: 35
Date of creation: 25 Jul 2002
Date of revision: 27 Aug 2005
Handle: RePEc:ore:uoecwp:2002-14

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Keywords: business cycles; sunspots; expectations; learning; stability;

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Cited by:
  1. George W. Evans & Seppo Honkapohja & Ramon Marimon, 2004. "Stable sunspot equilibria in a cash-in-advance economy," Economics Working Papers 844, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2005.
  2. Giannitsarou, Chryssi, 2006. "Balanced Budget Rules and Aggregate Instability: The Role of Consumption Taxes," CEPR Discussion Papers 5531, C.E.P.R. Discussion Papers.
  3. Evans, George W. & McGough, Bruce, 2003. "Monetary policy, indeterminacy and learning," CFS Working Paper Series 2003/37, Center for Financial Studies (CFS).
  4. Duffy, John & Xiao, Wei, 2007. "Instability of sunspot equilibria in real business cycle models under adaptive learning," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 879-903, April.
  5. Evans, George W. & McGough, Bruce, 2005. "Monetary policy and stable indeterminacy with inertia," Economics Letters, Elsevier, vol. 87(1), pages 1-7, April.
  6. McGough, Bruce & Meng, Qinglai & Xue, Jianpo, 2013. "Expectational stability of sunspot equilibria in non-convex economies," Journal of Economic Dynamics and Control, Elsevier, vol. 37(6), pages 1126-1141.
  7. Hirose, Yasuo, 2008. "Learnability and equilibrium selection under indeterminacy," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3459-3477, November.
  8. Weder, Mark, 2003. "On the plausibility of sunspot equilibria," Research in Economics, Elsevier, vol. 57(1), pages 65-81, March.

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