Eductive stability in real business cycle models

George W. Evans, Roger Guesnerie, Bruce McGough

    Research output: Contribution to journalArticlepeer-review

    5 Citations (Scopus)

    Abstract

    Within the standard RBC model we examine issues of expectational coordination on the unique rational expectations equilibrium. We show the sensitivity of agents’ plans and decisions to their short-run and longrun expectations is too great to trigger eductive coordination in a world of rational agents who are endowed with knowledge of the economic structure and contemplate the possibility of small deviations from equilibrium: eductive stability never obtains. We conclude adaptive learning must play a role in real-time dynamics. Our eductive instability theorem has a counterpart under adaptive learning: even with asymptotic stability the transition dynamics can involve large departures from rational expectations.
    Original languageEnglish
    Pages (from-to)821–852
    JournalThe Economic Journal
    Volume129
    Issue number618
    Early online date21 May 2018
    DOIs
    Publication statusPublished - Feb 2019

    Keywords

    • Learning
    • Expectational coordination
    • Stability

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