Indeterminacy and the Stability Puzzle in Non-Convex Economies
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Date
2002-07-25
Authors
Evans, George W., 1949-
McGough, Bruce
Journal Title
Journal ISSN
Volume Title
Publisher
University of Oregon, Dept. of Economics
Abstract
We extend common factor analysis to a multi-dimensional setting by considering a bivariate reduced form 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?
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Keywords
Stability, Earnings, Expectations, Sunspots, Business cycles, Macroeconomics, Microeconomics, Economic stabilization