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Stability of Sunspot Equilibria under Adaptive Learning with Imperfect Information

Author

Listed:
  • Bruce McGough

    (Department of Economics University of Oregon)

  • Ryuichi Nakagawa

    (Faculty of Economics Kansai University)

Abstract

This paper investigates whether sunspot equilibria are stable under agents’ adaptive learning with imperfect information sets of exogenous variables. Each exogenous variable is observable for a part of agents and unobservable from others so that agents’ forecasting models are heterogeneously misspecified. The paper finds that stability conditions of sunspot equilibria are relaxed or unchanged by imperfect information. In a basic New Keynesian model with highly imperfect information, sunspot equilibria are stable if and only if nominal interest rate rules violate the Taylor principle. This result is contrast to the literature in which sunspot equilibria are stable only if policy rules follow the principle, and is consistent with the observations during past business cycles fluctuations.

Suggested Citation

  • Bruce McGough & Ryuichi Nakagawa, 2019. "Stability of Sunspot Equilibria under Adaptive Learning with Imperfect Information," Working Papers on Central Bank Communication 005, University of Tokyo, Graduate School of Economics.
  • Handle: RePEc:upd:utmpwp:005
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Sunspot equilibria; Stability; Adaptive learning; Private information; Heterogeneous beliefs; Taylor principle;

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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