Stable sunspot solutions in models with predetermined variables

We consider a linear stochastic univariate rational expectations model, with a predetermined variable, and provide alternative representations of stationary sunspot equilibria (SSEs). For a strict subset of the parameter space there exist SSEs that are locally stable under least-squares learning provided agents use a common factor representation for their estimated law of motion. These results indicate that for some parameter regions SSEs are more likely to arise under private agent learning than previously recognized. (c) 2004 Elsevier B.V. All rights reserved.