Indeterminacy and the Stability Puzzle in Non-Convex Economies
University of Oregon, Economics Working Paper No. 243
35 Pages Posted: 30 Mar 2003
Date Written: July 25, 2002
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: Suggested Citation