Eductive stability in real business cycle models

Abstract

Within the standard real business cycle model, we examine issues of expectational coordination on the unique rational expectations equilibrium. We show 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 asymptotic stability, transition dynamics can involve large departures from rational expectations.