In this note stability conditions for the endogenous rational expectations business cycles detected by Diamond and Fudenberg (1989) are derived. It is shown that for the trading externality underlying their example, bifurcating cycles are always stable, i.e., there always exists a continuum of rational expectations equilibrium paths converging to the cycle.
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I am grateful to Reiner Franke and the referees of this Journal for their helpful comments and suggestions. I also thank my colleagues Wolfgang Hofmann and Bill Brunton for checking the language of the paper.
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Lux, T. A note on the stability of endogenous cycles in Diamond's model of search and barter. Zeitschr. f. Nationalökonomie 56, 185–196 (1992). https://doi.org/10.1007/BF01237519
- Stability Condition
- Economic Theory
- International Economic
- Business Cycle
- Rational Expectation