Indeterminacy and the Stability Puzzle in Non-Convex Economies

University of Oregon, Economics Working Paper No. 243

35 Pages Posted: 30 Mar 2003

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

Bruce McGough

Oregon State University - Department of Economics

Date Written: July 25, 2002

Abstract

We extend common factor analysis to a multi-dimensional setting by considering a bivariate reduced form model consistent with many Real Business Cycle type models. We show how to obtain new representations of sunspots and find that there are parameter regions in which these sunspots are stable under learning. However, once the parameters are restricted to coincide with those generated by certain standard models of indeterminacy, we find, under one information assumption, that no stable sunspots exist, and under another information assumption, that they exist only for a very small part of the indeterminacy region. This leads to the following puzzle: Why does indeterminacy almost always imply instability in RBC-type models?

Keywords: business cycles, sunspots, expectations, learning, stability

JEL Classification: E32, D83, D84

Suggested Citation

Evans, George W. and McGough, Bruce, Indeterminacy and the Stability Puzzle in Non-Convex Economies (July 25, 2002). University of Oregon, Economics Working Paper No. 243, Available at SSRN: https://ssrn.com/abstract=322642 or http://dx.doi.org/10.2139/ssrn.322642

George W. Evans (Contact Author)

University of Oregon - Department of Economics ( email )

1285 University of Oregon
Eugene, OR 97403
United States
541-346-4662 (Phone)
541-346-1243 (Fax)

University of St. Andrews - School of Economics and Finance ( email )

The Scores, Castlecliff
St. Andrews, Fife KY16 8RD
United Kingdom
44-1334-462435 (Phone)

HOME PAGE: http://www.st-andrews.ac.uk/economics/staff/pages.g.evans.shtml

Bruce McGough

Oregon State University - Department of Economics ( email )

303 Ballard Extension Hall
Corvallis, OR 97331
United States
541-737-2321 (Phone)
541-737-5917 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
41
Abstract Views
747
PlumX Metrics