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 first 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.