Expectational Stability of Resonant Frequency Sunspot Equilibria
15 Pages Posted: 1 Aug 2001
Date Written: June 2001
Abstract
We consider the stability under adaptive learning of the complete set of solutions to the basic linear forward looking model in which the current value of the state variable depends linearly on the (subjectively) expected value of the state next period and the coefficient of the expected state is bigger than one in absolute value. In addition to the fundamentals solution, the literature describes both finite-state Markov sunspot solutions, satisfying a resonant frequency condition, and autoregressive solutions depending on an arbitrary martingale difference sequence. We clarify the relationships between these solutions and show that the stability properties of equilibria may depend crucially on the representation used by agents in the learning process. Only the finite-state Markov sunspot solutions can be stable under learning.
Keywords: Indeterminacy, Representations of Solutions, Learnability, Expectational Stability, Endogenous Fluctuations
JEL Classification: C62, D83 D84, E31, E32
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Social Learning and Monetary Policy Rules
By Jasmina Arifovic, James Bullard, ...
-
Imperfect Knowledge, Inflation Expectations, and Monetary Policy
-
Imperfect Knowledge, Inflation Expectations, and Monetary Policy
-
Expectations and the Stability Problem for Optimal Monetary Policies
By George W. Evans and Seppo Honkapohja
-
Expectations and the Stability Problem for Optimal Monetary Policies
By George W. Evans and Seppo Honkapohja
-
Expectations and the Stability Problem for Optimal Monetary Policies
By George W. Evans and Seppo Honkapohja