Expectational Stability of Stationary Sunspot Equilibria in a Forward-Looking Linear Model

Posted: 13 Aug 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

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

Abstract

We consider the stability under adaptive learning of the complete set of solutions to the model x(t)= b*Ex{t+1} when |b| > 1. In addition to the fundamentals solution, the literature describes both finite-state Markov sunspot solutions 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. Autoregressive forms of solutions are not learnable, but finite-state Markov sunspot solutions are stable under learning if b < -1.

Keywords: indeterminacy, representations of solutions, learnability, expectational stability, endogenous fluctuations

JEL Classification: C62, D83, E31, E32

Suggested Citation

Evans, George W. and Honkapohja, Seppo and Honkapohja, Seppo, Expectational Stability of Stationary Sunspot Equilibria in a Forward-Looking Linear Model. Available at SSRN: https://ssrn.com/abstract=322661

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

Seppo Honkapohja

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Aalto University School of Business ( email )

, PO Box 21210
Aalto FI-00076
Finland

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Aalto University - School of Business

Finland

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