Expectational Stability and the Multiple Equilibria Problem in Linear Rational Expectations Models

George Evans

The Quarterly Journal of Economics, 1985, vol. 100, issue 4, 1217-1233

Abstract: Linear models involving expectations of future endogenous variables generally have multiple rational expectations equilibria. This paper investigates the stability of solutions in the disequilibrium sense of whether, given a small deviation of expectations functions from some rational expectations equilibrium, the system returns to that solution under a natural revision rule. Weak and strong local stability are distinguished. Stability conditions are calculated for a simple general linear model and applied to two macroeconomic examples. In some cases there is a unique stable equilibrium. In other cases a continuum of equilibria forms a weakly but not strongly stable class.

Date: 1985
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