Stability of Sunspot Equilibria under Adaptive Learning with Imperfect Information
Bruce McGough () and
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Ryuichi Nakagawa: Faculty of Economics Kansai University
No 5, Working Papers on Central Bank Communication from University of Tokyo, Graduate School of Economics
This paper investigates whether sunspot equilibria are stable under agentsâ€™ adaptive learning with imperfect information sets of exogenous variables. Each exogenous variable is observable for a part of agents and unobservable from others so that agentsâ€™ forecasting models are heterogeneously misspecified. The paper finds that stability conditions of sunspot equilibria are relaxed or unchanged by imperfect information. In a basic New Keynesian model with highly imperfect information, sunspot equilibria are stable if and only if nominal interest rate rules violate the Taylor principle. This result is contrast to the literature in which sunspot equilibria are stable only if policy rules follow the principle, and is consistent with the observations during past business cycles fluctuations.
Keywords: Sunspot equilibria; Stability; Adaptive learning; Private information; Heterogeneous beliefs; Taylor principle (search for similar items in EconPapers)
JEL-codes: C62 D83 E52 (search for similar items in EconPapers)
Pages: 49 pages
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:upd:utmpwp:005
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