Existence of Adaptively Stable Sunspot Equilibria Near an Indeterminate Steady State

Evans, George W.; Honkapohja, Seppo

doi:10.2139/ssrn.273354

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Existence of Adaptively Stable Sunspot Equilibria Near an Indeterminate Steady State

17 Pages Posted: 11 Jul 2001

See all articles by George W. Evans

George W. Evans

University of Oregon - Department of Economics; University of St. Andrews - School of Economics and Finance

Seppo Honkapohja

Centre for Economic Policy Research (CEPR); Aalto University School of Business; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Aalto University - School of Business

There are 2 versions of this paper

Date Written: May 2001

Abstract

We examine the nonlinear one-step forward-looking model, in which the current state is a function of the (subjective) expected value of a nonlinear function of the state next period. Stationary Markov Sunspot Equilibria (SSEs) are known to exist near an indeterminate steady state, i.e. when the derivative of the function at the steady state is bigger than one in absolute value. We show that there exist Markov SSEs that are E- stable, and therefore locally stable under adaptive learning, if the value of this derivative is less than minus one.

Keywords: Indeterminacy, Learnability, Expectational Stability, Endogenous Fluctuations

JEL Classification: C62, D83, D84, E31, E32

Suggested Citation: Suggested Citation

Evans, George W. and Honkapohja, Seppo and Honkapohja, Seppo, Existence of Adaptively Stable Sunspot Equilibria Near an Indeterminate Steady State (May 2001). Available at SSRN: https://ssrn.com/abstract=273354 or http://dx.doi.org/10.2139/ssrn.273354