Featured research (2)
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 long-run 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 asymp-totic stability the transition dynamics can involve large departures from rational expectations. JEL Classifications: D84, D83, E32
This paper shows that belief-driven economic fluctuations are a general feature of many determinate macroeconomic models. Model misspecification can break the link between indeterminacy and sunspots by establishing the existence of "statistical sunspots" in models that have a unique rational expectations equilibrium. Building on the insights of Marcet and Sargent (1989) and Sargent (1991), with some state variables 'hidden' to a set of agents the state vector expands to include agents' expectations and, in a restricted perceptions equilibrium, agents form beliefs by projecting the state vector onto their set of observables. This set of observables can include serially correlated non-fundamental factors (e.g. sunspots, judgment, expectations shocks, etc.). Agents attribute, in a self-fulfilling way, some of the serial correlation observed in data to extrinsic noise, i.e. statistical sunspots. This leads to sunspot equilib-ria in models with a unique rational expectations equilibrium. Unlike rational sunspots, these equilibria are stable under learning. Applications are developed in the context of a New Keynesian, an asset-pricing, and a pure monetary model.