INSTABILITY OF SUNSPOT EQUILIBRIA IN REAL BUSINESS CYCLE MODELS UNDER INFINITE HORIZON LEARNING

Yangyang Ji and Wei Xiao

Macroeconomic Dynamics, 2018, vol. 22, issue 8, 1978-2006

Abstract: This paper examines the stability of sunspot equilibria in one-sector RBC models under infinite horizon learning. We present general conditions under which the reduced-form model can possess E-stable sunspot equilibria and apply these conditions to three prominent one-sector RBC models. We find that the rational expectations sunspot equilibria are generally unstable under learning.

Date: 2018
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