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The indeterminacy school in macroeconomics exploits the fact that macroeconomic models often display multiple equilibria to understand real-world phenomena. There are two distinct phases in the evolution of its history. The first phase began as a research agenda at the University of Pennsylvania in the United States and at CEPREMAP in Paris in the early 1980s. This phase used models of dynamic indeterminacy to explain how shocks to beliefs can temporarily influence economic outcomes. The second phase was developed at the University of California Los Angeles in the 2000s. This phase used models of incomplete factor markets to explain how shocks to beliefs can permanently influence economic outcomes. The first phase of the indeterminacy school has been used to explain volatility in financial markets. The second phase of the indeterminacy school has been used to explain periods of high persistent unemployment. The two phases of the indeterminacy school provide a microeconomic foundation for Keynes’ general theory that does not rely on the assumption that prices and wages are sticky.


George W. Evans and Bruce McGough

While rational expectations (RE) remains the benchmark paradigm in macro-economic modeling, bounded rationality, especially in the form of adaptive learning, has become a mainstream alternative. Under the adaptive learning (AL) approach, economic agents in dynamic, stochastic environments are modeled as adaptive learners forming expectations and making decisions based on forecasting rules that are updated in real time as new data become available. Their decisions are then coordinated each period via the economy’s markets and other relevant institutional architecture, resulting in a time-path of economic aggregates. In this way, the AL approach introduces additional dynamics into the model—dynamics that can be used to address myriad macroeconomic issues and concerns, including, for example, empirical fit and the plausibility of specific rational expectations equilibria. AL can be implemented as reduced-form learning, that is, the implementation of learning at the aggregate level, or alternatively, as discussed in a companion contribution to this Encyclopedia, Evans and McGough, as agent-level learning, which includes pre-aggregation analysis of boundedly rational decision making. Typically learning agents are assumed to use estimated linear forecast models, and a central formulation of AL is least-squares learning in which agents recursively update their estimated model as new data become available. Key questions include whether AL will converge over time to a specified RE equilibrium (REE), in which cases we say the REE is stable under AL; in this case, it is also of interest to examine what type of learning dynamics are observed en route. When multiple REE exist, stability under AL can act as a selection criterion, and global dynamics can involve switching between local basins of attraction. In models with indeterminacy, AL can be used to assess whether agents can learn to coordinate their expectations on sunspots. The key analytical concepts and tools are the E-stability principle together with the E-stability differential equations, and the theory of stochastic recursive algorithms (SRA). While, in general, analysis of SRAs is quite technical, application of the E-stability principle is often straightforward. In addition to equilibrium analysis in macroeconomic models, AL has many applications. In particular, AL has strong implications for the conduct of monetary and fiscal policy, has been used to explain asset price dynamics, has been shown to improve the fit of estimated dynamic stochastic general equilibrium (DSGE) models, and has been proven useful in explaining experimental outcomes.