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Eductive Stability in Real Business Cycle Models

  • George W. Evans

    ()

    (University of Oregon Economics Department and University of St. Andrews)

  • Roger Guesnerie

    ()

    (Paris School of Economics and Collège de France)

  • Bruce McGough

    ()

    (Oregon State University)

We reexamine issues of coordination in the standard RBC model. Is the unique rational expectations equilibrium attainable by rational agents who contemplate the possibility of small deviations from equilibrium? Surprisingly, we find that coordination cannot be expected. Even with strong common knowledge assumptions, rational agents anticipating small but persistent deviations are led to take actions that eventually contradict the common knowledge assumption. This “impossibility†theorem for eductive learning is not fully overcome when adaptive learning is incorporated into the framework.

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File URL: http://economics.uoregon.edu/papers/UO-2010-16_Evans_Eductive_Stability.pdf
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Paper provided by University of Oregon Economics Department in its series University of Oregon Economics Department Working Papers with number 2010-16.

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Length: 33
Date of creation: 13 Nov 2010
Date of revision:
Handle: RePEc:ore:uoecwp:2010-16
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  1. George W. Evans & Seppo Honkapohja, 2008. "Learning and Macroeconomics," University of Oregon Economics Department Working Papers 2008-3, University of Oregon Economics Department.
  2. Benhabib Jess & Farmer Roger E. A., 1994. "Indeterminacy and Increasing Returns," Journal of Economic Theory, Elsevier, vol. 63(1), pages 19-41, June.
  3. Evans, George W. & Guesnerie, Roger, 2005. "Coordination on saddle-path solutions: the eductive viewpoint--linear multivariate models," Journal of Economic Theory, Elsevier, vol. 124(2), pages 202-229, October.
  4. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
  5. D. B. Bernheim, 2010. "Rationalizable Strategic Behavior," Levine's Working Paper Archive 661465000000000381, David K. Levine.
  6. Desgranges, Gabriel & Ghosal, Sayantan, 2010. "P-Stable Equilibrium : Definition and Some Properties," The Warwick Economics Research Paper Series (TWERPS) 952, University of Warwick, Department of Economics.
  7. George W. Evans & Seppo Honkapohja, 2003. "Expectations and the Stability Problem for Optimal Monetary Policies," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 807-824.
  8. Stefano Eusepi & Bruce Preston, 2011. "Expectations, Learning, and Business Cycle Fluctuations," American Economic Review, American Economic Association, vol. 101(6), pages 2844-72, October.
  9. Cars Hommes, 2010. "The heterogeneous expectations hypothesis: some evidence from the lab," Post-Print hal-00753041, HAL.
  10. Evans, George W & Honkapohja, Seppo, 1995. "Local Convergence of Recursive Learning to Steady States and Cycles in Stochastic Nonlinear Models," Econometrica, Econometric Society, vol. 63(1), pages 195-206, January.
  11. R. Guesnerie, 2002. "Anchoring Economic Predictions in Common Knowledge," Econometrica, Econometric Society, vol. 70(2), pages 439-480, March.
  12. Brock, W.A. & Hommes, C.H., 1996. "A Rational Route to Randomness," Working papers 9530r, Wisconsin Madison - Social Systems.
  13. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  14. Hommes, C.H. & Wagener, F.O.O., 2009. "Does eductive stability imply evolutionary stability?," CeNDEF Working Papers 09-10, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  15. Matsui, Akihiko & Oyama, Daisuke, 2006. "Rationalizable foresight dynamics," Games and Economic Behavior, Elsevier, vol. 56(2), pages 299-322, August.
  16. Roger Guesnerie & Pedro Jara-Moroni, 2011. "Expectational coordination in simple economic contexts," Economic Theory, Springer, vol. 47(2), pages 205-246, June.
  17. Stéphane Gauthier & Roger Guesnerie, 2005. "Comparing Expectational Stability Criteria in Dynamic Models: A Preparatory Overview," Post-Print hal-00731535, HAL.
  18. Bray, Margaret M & Savin, Nathan E, 1986. "Rational Expectations Equilibria, Learning, and Model Specification," Econometrica, Econometric Society, vol. 54(5), pages 1129-60, September.
  19. Sargent, Thomas J., 1993. "Bounded Rationality in Macroeconomics: The Arne Ryde Memorial Lectures," OUP Catalogue, Oxford University Press, number 9780198288695, May.
  20. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  21. Howitt, Peter, 1992. "Interest Rate Control and Nonconvergence to Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 776-800, August.
  22. Evans George W. & Guesnerie Roger, 1993. "Rationalizability, Strong Rationality, and Expectational Stability," Games and Economic Behavior, Elsevier, vol. 5(4), pages 632-646, October.
  23. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, vol. 48(2), pages 337-368, August.
  24. repec:pit:wpaper:518 is not listed on IDEAS
  25. Preston, Bruce, 2006. "Adaptive learning, forecast-based instrument rules and monetary policy," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 507-535, April.
  26. Pearce, David G, 1984. "Rationalizable Strategic Behavior and the Problem of Perfection," Econometrica, Econometric Society, vol. 52(4), pages 1029-50, July.
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