Understanding self-fulfilling rational expectations equilibria in real business cycle models

Necessary conditions for indeterminacy in standard RBC models have been ext ensively studied, but intuitive understanding of the economic mechanism tha t generates indeterminacy has yet to be fully explored. Following the perma nent income theory, this paper provides an alternative framework for unders tanding and deriving the technical conditions of indeterminacy in RBC model s. A virtue of this approach is that in deriving the conditions of indeterm inacy, one can see clearly not only how indeterminacy arises but also how r obust the indeterminacy is to structural perturbations in preferences. tech nologies, and market structures. (C) 2001 Elsevier Science B.V. All rights reserved.