Instability of sunspot equilibria in real business cycle models under adaptive learning |
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Authors: | John Duffy Wei Xiao |
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Institution: | a Department of Economics, University of Pittsburgh, 230 S. Bouquet Street, Pittsburgh, PA 15260, USA b Department of Economics and Finance, University of New Orleans, 2000 Lakeshore Drive, New Orleans, LA 70148, USA |
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Abstract: | We provide conditions under which a general, reduced-form class of real business cycle (RBC) models has rational expectations equilibria that are both indeterminate and stable under adaptive learning. Indeterminacy of equilibrium allows for the possibility that non-fundamental “sunspot” variable realizations can be used to drive the model, and several researchers have offered calibrated structural models where sunspot shocks play such a role. However, we show that the structural restrictions researchers have adopted lead to reduced-form systems that are always unstable under adaptive learning dynamics, thus calling into question the plausibility of these sunspot-driven RBC models. |
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Keywords: | C62 D83 D84 E32 |
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