Stable near-rational sunspot equilibria

George W. Evans, Bruce McGough

    Research output: Contribution to journalArticlepeer-review

    2 Citations (Scopus)

    Abstract

    We introduce a new class of solutions to nonlinear forward-looking models called near-rational sunspot equilibria (NRSE). NRSE are natural nonlinear extensions of the usual sunspot equilibria associated with the linearized version of the economy, and are near-rational in that agents use the optimal linear forecasting model when forming expectations. Generic results for existence and stability under learning are established. NRSE in indeterminate nonlinear models are found to be stable under learning provided that the corresponding linearized model's minimal state variable solution is E-stable. NRSE are readily computable, and our results make it possible to use the standard linear tools to search for stable NRSE. We illustrate our results using a canonical nonlinear New Keynesian model.
    Original languageEnglish
    Article number104987
    Number of pages33
    JournalJournal of Economic Theory
    Volume186
    Early online date10 Jan 2020
    DOIs
    Publication statusPublished - Mar 2020

    Keywords

    • E-stability
    • Sunspot equilibria
    • Nonlinear dynamics
    • Indeterminacy
    • MSV principle

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