Eductive Stability in Real Business Cycle Models

Within the standard RBC model, we examine issues of expectational coordination on the unique rational expectations equilibrium. Our study …rst provides a comprehensive assessment of the sensitivity of agents’plans and decisions to their short-run and long-run expectations. We show this sensitivity is much too great to trigger eductive coordination in a world of hyper-rational agents, who are endowed with Common Knowledge and contemplate the possibility of small deviations from equilibrium: eductive stability never obtains. This impossibility theorem has a counterpart when adaptive learning is incorporated and real-time paths are required to satisfy a collective initial view of the future. We are indebted for helpful comments from participants in seminars at Oxford, Paris, Chicago, Columbia, the Delhi School of Economics, New York University, Oregon, and St. Andrews, and in particular from C. Chamley, G. Desgranges, G. Gaballo, S. Gauthier, T. Sadzik, H. Uhlig and M. Woodford. Financial support from National Science Foundation Grant no. SES-1025011 is gratefully acknowledged.