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REPRESENTATIONS AND SUNSPOT STABILITY

George Evans () and Bruce McGough ()

Macroeconomic Dynamics, 2011, vol. 15, issue 1, 80-92

Abstract: By endowing his agents with simple forecasting models, or representations, M. Woodford (“Learning to Believe in Sunspots,†Econometrica 58, 277–307, 1990) found that finite state Markov sunspot equilibria may be stable under learning. We show that common factor representations generalize to all sunspot equilibria the representations used by Woodford. We find that if finite state Markov sunspots are stable under learning then all sunspots are stable under learning, provided common factor representations are used.

Date: 2011
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