Data Management

Eductive Stability In Real Business Cycle Models

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Executive Summary

The authors re-examine issues of coordination in the standard RBC model. Can the unique the unique rational expectations equilibrium be "Educed" by rational agents who contemplate the possibility of small deviations from equilibrium? Surprisingly, the authors find that coordination along this line cannot be expected. Rational agents anticipating small but possibly persistent deviations have to face the existence of retroactions that necessarily invalidate any initial tentative "Common knowledge" of the future. This "Impossibility" theorem for eductive learning is not fully overcome when adaptive learning is incorporated into the framework.

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