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Indeterminacy and the Stability Puzzle in Non-Convex Economies

George Evans () and Bruce McGough ()

University of Oregon Economics Department Working Papers from University of Oregon Economics Department

Abstract: We extend common factor analysis to a multi-dimensional setting by considering a bivariate reduced form consistent with many Real Business Cycle type models. We show how to obtain new representations of sunspots and find that there are parameter regions in which these sunspots are stable under learning. However, once the parameters are restricted to coincide with those generated by certain 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?

Keywords: business cycles; sunspots; expectations; learning; stability (search for similar items in EconPapers)
JEL-codes: D83 D84 E32 (search for similar items in EconPapers)
Pages: 35
Date: 2002-07-25, Revised 2005-08-27
New Economics Papers: this item is included in nep-dge and nep-mac
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Journal Article: Indeterminacy and the Stability Puzzle in Non-Convex Economies (2005) Downloads
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