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Expectational stability of sunspot equilibria in non-convex economies

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  • McGough, Bruce
  • Meng, Qinglai
  • Xue, Jianpo

Abstract

We examine the stability under learning (E-stability) of sunspot equilibria in non-convex real business cycle models. The production technology is Cobb–Douglas with externalities generated by factor inputs. We establish that, with a general utility function, the well-known Benhabib–Farmer condition (Benhabib and Farmer, 1994) – that the labor-demand curve is upward-sloping and steeper than the Frisch labor-supply curve – is necessary for joint indeterminacy and E-stability. Then, with a separable utility function and allowing for negative externalities from capital inputs, we discover large regions in parameter space corresponding to stable indeterminacy, that is, learnable sunspot equilibria. These existence results overturn the conventional wisdom that sunspot equilibria in RBC-type models are inherently unstable, and provide concise closure to the stability puzzle of Evans and McGough (2005b).

Suggested Citation

  • McGough, Bruce & Meng, Qinglai & Xue, Jianpo, 2013. "Expectational stability of sunspot equilibria in non-convex economies," Journal of Economic Dynamics and Control, Elsevier, vol. 37(6), pages 1126-1141.
    • Handle: RePEc:eee:dyncon:v:37:y:2013:i:6:p:1126-1141
    DOI: 10.1016/j.jedc.2013.01.012
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    Cited by:

    1. Evans, George W & McGough, Bruce, 2018. "Equilibrium selection, observability and backward-stable solutions," Journal of Monetary Economics, Elsevier, vol. 98(C), pages 1-10.
    2. Berardi, Michele, 2015. "On the fragility of sunspot equilibria under learning and evolutionary dynamics," Journal of Economic Behavior & Organization, Elsevier, vol. 112(C), pages 251-265.
    3. Shea, Paul, 2016. "Short-sighted managers and learnable sunspot equilibria," Journal of Macroeconomics, Elsevier, vol. 48(C), pages 117-126.
    4. Ignacio Escañuela ROMANA, 2016. "Randomness, Determinism and Undecidability in the Economic Cycle Theory," Journal of Economics and Political Economy, KSP Journals, vol. 3(4), pages 638-658, December.
    5. Nakagawa, Ryuichi, 2015. "Learnability of an equilibrium with private information," Journal of Economic Dynamics and Control, Elsevier, vol. 59(C), pages 58-74.
    6. Escañuela Romana, Ignacio, 2016. "Azar, Determinismo e Indecidibilidad en la Teoría del Ciclo Económico [Randomness, Determinism and Undecidability in the Business Cycle Theory]," MPRA Paper 72978, University Library of Munich, Germany.
    7. Arifovic, Jasmina & Evans, George W. & Kostyshyna, Olena, 2020. "Are sunspots learnable? An experimental investigation in a simple macroeconomic model," Journal of Economic Dynamics and Control, Elsevier, vol. 110(C).
    8. Bruce McGough & Ryuichi Nakagawa, 2019. "Stability of Sunspot Equilibria under Adaptive Learning with Imperfect Information," Working Papers on Central Bank Communication 005, University of Tokyo, Graduate School of Economics.

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    More about this item

    Keywords

    Real business cycle models; Indeterminacy; Expectational stability; Externalities; Preferences;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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