Abstract
This chapter reviews the issue of equilibrium indeterminacy in macroeconomics. Instead of providing a broad literature survey, we consider two simple examples. One is a univariable rational expectations model of asset price determination. The other is a general equilibrium model of monetary economy. When discussing both examples, we classify the models into three categories: the steady state of the model economy is (i) unique, (ii) multiple, and (iii) a continuum. The majority of foregoing studies have treated models with a unique steady state. However, there are some interesting situations in which multiple steady state equilibria exist or the steady state of the economy constitutes a continuum.
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Notes
- 1.
Cass and Shell (1983) distinguished extrinsic uncertainty from intrinsic uncertainty. The former has no effect on the fundamentals of an economy such as preferences and technologies, whereas the latter affects the fundamentals.
- 2.
“Multiple equilibria” and “equilibrium indeterminacy” are sometimes used as interchangeable terms. Precisely speaking, the presence of multiple equilibria in macrodynamic models is necessary but not sufficient for equilibrium indeterminacy In the literature, if a model economy involves multiple paths under rational expectations (perfect foresight in the case of deterministic environment), then the equilibrium path of the economy is called indeterminate.
- 3.
As is well known, Jevons (1884) claimed that solar activities could generate business cycles, because they could affect weather condition for agriculture. Hence, as opposed to Cass and Shell (1983), Jevons consided that sunspots represent intrinsic uncertainty that directly affects the agricultural production condition.
- 4.
We refer to Farmer’s studies on unemployment equilibria in Chap. 7
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Mino, K. (2017). Introduction. In: Growth and Business Cycles with Equilibrium Indeterminacy. Advances in Japanese Business and Economics, vol 13. Springer, Tokyo. https://doi.org/10.1007/978-4-431-55609-1_1
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