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On the Local Stability of Sunspot Equilibria Under Adaptive Learning Rules - (Now published in 'Journal of Economic Theory', vol.64 (1994), pp.142-161.)

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  • George W. Evans
  • Seppo Honkapohja

Abstract

We examine local stability under learning of stationary Markov sunspot equilibria (SSEs) in a simply dynamic nonlinear model. Necessary and sufficient conditions for local convergence of a recursive learning algorithm to SSEs are shown to be given (generically) by expectational stability (E-stability) conditions. We distinguish between weak and strong E-stability, where the latter requires stability also with respect to overparameterizations of the sunspot solution. Weak and strong E-stability of the corresponding deterministic solutions. The E-stability of SSEs near a single deterministic steadt state is also analyzed. Three economic applications are given: the standard OLG (overlapping generations) model, the OLG model with government expenditures finances by seignorage, and the OLG model with increasing social returns in production.

Suggested Citation

  • George W. Evans & Seppo Honkapohja, 1992. "On the Local Stability of Sunspot Equilibria Under Adaptive Learning Rules - (Now published in 'Journal of Economic Theory', vol.64 (1994), pp.142-161.)," STICERD - Theoretical Economics Paper Series 249, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    • Handle: RePEc:cep:stitep:249
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