Published and unpublished papers by Wei Xiao

Instability of Sunspot Equilibria in RBC Models Under Adaptive Learning

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Jointly with John Duffy. Journal of Monetary Economics 54 (2007), pp. 879-903. (Download working paper version).

We provide conditions under which a general, reduced-form class of real business cycle (RBC) models has rational expectations equilibria that are both indeterminate and stable under adaptive learning. Indeterminacy of equilibrium allows for the possibility that non-fundamental “sunspot” variable realizations can be used to drive the model, and several researchers have offered calibrated structural models where sunspot shocks play such a role. However, we show that the structural restrictions researchers have adopted lead to reduced-form systems that are always unstable under adaptive learning dynamics, thus calling into question the plausibility of these sunspot-driven RBC models. 


Written by wxiao

January 21, 2009 at 7:35 pm

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