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Indeterminacy and the Stability Puzzle in Non-Convex Economies

George Evans () and Bruce McGough ()

The B.E. Journal of Macroeconomics, 2005, vol. 5, issue 1, 1-46

Abstract: We examine stability under learning of sunspot equilibria in Real Business Cycle type models with indeterminacies. Our analysis emphasizes the importance of examining alternative representations of sunspot solutions. A general bivariate reduced form contains parameter regions in which sunspots are stable under learning. However, for parameters restricted to those generated by 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?

Date: 2005
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DOI: 10.2202/1534-6005.1264

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