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Stable near-rational sunspot equilibria

George Evans () and Bruce McGough ()

Journal of Economic Theory, 2020, vol. 186, issue C

Abstract: We introduce a new class of solutions to nonlinear forward-looking models called near-rational sunspot equilibria (NRSE). NRSE are natural nonlinear extensions of the usual sunspot equilibria associated with the linearized version of the economy, and are near-rational in that agents use the optimal linear forecasting model when forming expectations. Generic results for existence and stability under learning are established. NRSE in indeterminate nonlinear models are found to be stable under learning provided that the corresponding linearized model's minimal state variable solution is E-stable. NRSE are readily computable, and our results make it possible to use the standard linear tools to search for stable NRSE. We illustrate our results using a canonical nonlinear New Keynesian model.

Keywords: E-stability; Sunspot equilibria; Nonlinear dynamics; Indeterminacy; MSV principle (search for similar items in EconPapers)
JEL-codes: C62 D83 D84 E32 E71 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.jet.2019.104987

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