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Equilibrium Determinacy With Behavioral Expectations

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  • Jonathan J Adams

    (Department of Economics, University of Florida)

Abstract

When do dynamic models with behavioral expectations have unique solutions? I derive a Blanchard-Kahn-style condition that ensures a unique solution exists in a broad class of models: the number of non-predetermined variables must match the number of the model's unstable eigenvalues. With behavioral expectations, an eigenvalue is unstable if it is larger in magnitude than the spectral radius of the expectation operator. The condition is always sufficient, but only necessary for some forms of expectations: many behavioral expectations do not admit sunspot equilibria in some types of models. Next, I illustrate the determinacy conditions in several examples, including the canonical New Keynesian model, which has a unique equilibrium under an interest rate peg when expectations are given by a variety of common heuristics. Finally, I characterize the spectral radii and other properties of a variety of popular behavioral expectations.

Suggested Citation

  • Jonathan J Adams, 2023. "Equilibrium Determinacy With Behavioral Expectations," Working Papers 001008, University of Florida, Department of Economics.
    • Handle: RePEc:ufl:wpaper:001008
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    References listed on IDEAS

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    Cited by:

    1. Jonathan J Adams, 2024. "Optimal Policy Without Rational Expectations: A Sufficient Statistic Solution," Working Papers 001011, University of Florida, Department of Economics.

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    More about this item

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General

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