Stable near-rational sunspot equilibria
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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.
Evans , G W & McGough , B 2020 , ' Stable near-rational sunspot equilibria ' , Journal of Economic Theory , vol. 186 , 104987 . https://doi.org/10.1016/j.jet.2019.104987
Journal of Economic Theory
Copyright © 2019 Published by Elsevier Inc. This work has been made available online in accordance with publisher policies or with permission. Permission for further reuse of this content should be sought from the publisher or the rights holder. This is the author created accepted manuscript following peer review and may differ slightly from the final published version. The final published version of this work is available at https://doi.org/10.1016/j.jet.2019.104987
DescriptionFinancial support from National Science Foundation Grant No. SES-1559209 is gratefully acknowledged.
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