Expectational stability of sunspot equilibria in non-convex economies

McGough, Bruce, Meng, Qinglai and Xue, Jianpo 2013, Expectational stability of sunspot equilibria in non-convex economies, Journal of economic dynamics and control, vol. 37, no. 6, pp. 1126-1141, doi: 10.1016/j.jedc.2013.01.012.

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Title Expectational stability of sunspot equilibria in non-convex economies
Author(s) McGough, Bruce
Meng, Qinglai
Xue, Jianpo
Journal name Journal of economic dynamics and control
Volume number 37
Issue number 6
Start page 1126
End page 1141
Total pages 16
Publisher Elsevier
Place of publication Amsterdam, The Netherlands
Publication date 2013-06
ISSN 0165-1889
Keyword(s) Real business cycle models Indeterminacy Expectational stability Externalities Preference
Summary We examine the stability under learning (E-stability) of sunspot equilibria in non-convex real business cycle models. The production technology is Cobb-Douglas with externalities generated by factor inputs. We establish that, with a general utility function, the well-known Benhabib-Farmer condition (Benhabib and Farmer, 1994) - that the labor-demand curve is upward-sloping and steeper than the Frisch labor-supply curve - is necessary for joint indeterminacy and E-stability. Then, with a separable utility function and allowing for negative externalities from capital inputs, we discover large regions in parameter space corresponding to stable indeterminacy, that is, learnable sunspot equilibria. These existence results overturn the conventional wisdom that sunspot equilibria in RBC-type models are inherently unstable, and provide concise closure to the stability puzzle of Evans and McGough (2005b).
Language eng
DOI 10.1016/j.jedc.2013.01.012
Field of Research 140199 Economic Theory not elsewhere classified
1402 Applied Economics
1401 Economic Theory
1502 Banking, Finance And Investment
Socio Economic Objective 970114 Expanding Knowledge in Economics
HERDC Research category C1.1 Refereed article in a scholarly journal
ERA Research output type C Journal article
Copyright notice ©2013, Elsevier B.V.
Persistent URL http://hdl.handle.net/10536/DRO/DU:30083621

Document type: Journal Article
Collections: Faculty of Business and Law
Department of Economics
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