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Indeterminacy and the Stability Puzzle in Non-Convex Economies

  • George W. Evans


    (University of Oregon Economics Department)

  • Bruce McGough

    (Oregon State University Economics Department)

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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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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