Stability of Sunspot Equilibria under Adaptive Learning with Imperfect Information

Bruce McGough () and Ryuichi Nakagawa
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Ryuichi Nakagawa: Faculty of Economics Kansai University

No 5, Working Papers on Central Bank Communication from University of Tokyo, Graduate School of Economics

Abstract: This paper investigates whether sunspot equilibria are stable under agents’ adaptive learning with imperfect information sets of exogenous variables. Each exogenous variable is observable for a part of agents and unobservable from others so that agents’ forecasting models are heterogeneously misspecified. The paper finds that stability conditions of sunspot equilibria are relaxed or unchanged by imperfect information. In a basic New Keynesian model with highly imperfect information, sunspot equilibria are stable if and only if nominal interest rate rules violate the Taylor principle. This result is contrast to the literature in which sunspot equilibria are stable only if policy rules follow the principle, and is consistent with the observations during past business cycles fluctuations.

Keywords: Sunspot equilibria; Stability; Adaptive learning; Private information; Heterogeneous beliefs; Taylor principle (search for similar items in EconPapers)
JEL-codes: C62 D83 E52 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2019-01
New Economics Papers: this item is included in nep-mac
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