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Self-Fulfilling Prophecies And The Business Cycle

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Author Info
FARMER, ROGER E.A.
WOODFORD, MICHAEL

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Abstract

We demonstrate that multiple stationary rational-expectationsequilibria exist in a version of Lucas s island economy. Theexistence of these equilibria follows from the fact that there is an indeterminate set of monetary equilibria in the two-period overlapping-generations model. We show how to construct stationaryrational-expectations equilibria by randomizing over the set ofnonstationary monetary equilibria. In some of our equilibria, apositively sloped Phillips curve exists even though our economycontains no signal-extraction problem as in the original Lucas paper.Our equilibria are indexed by beliefs and are examples of theexistence of sunspot equilibria in which allocations may differacross states of nature for which preferences, technology, andendowments are identical. Our technique for constructing stationarysunspot equilibria should prove useful in a wide class of models inwhich an indeterminate stationary equilibrium exists.

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Publisher Info
Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 1 (1997)
Issue (Month): 04 (December)
Pages: 740-769
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Handle: RePEc:cup:macdyn:v:1:y:1997:i:04:p:740-769_00

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  1. Jess Benhabib & Roger E.A. Farmer, 1992. "Indeterminacy and Increasing Returns," UCLA Economics Working Papers 646, UCLA Department of Economics. [Downloadable!]
    Other versions:
  2. Benhabib, J. & Farmer, R.E.A., 1996. "The Monetary Transmission Mechanism," Working Papers 96-13, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
    Other versions:
  3. Bill Dupor, 2005. "Keynesian Conundrum: Multiplicity and Time Consistent Stabilization," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(1), pages 154-177, January. [Downloadable!] (restricted)
  4. Roger E.A. Farmer, 1989. "The Lucas Critique Policy Invariance and Multiple Equilibria," UCLA Economics Working Papers 551, UCLA Department of Economics. [Downloadable!]
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  5. Ricardo Lagos & Randall Wright, 2002. "Dynamics, cycles and sunspot equilibria in "genuinely dynamic, fundamentally disaggregative" models of money," Working Paper 0210, Federal Reserve Bank of Cleveland. [Downloadable!]
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  6. Lawrence J. Christiano & Sharon G. Harrison, 1996. "Chaos, Sunspots, and Automatic Stabilizers," NBER Working Papers 5703, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Erkki Koskela & Mikko Puhakka, 2003. "Stabilizing Competitive Cycles with Distortionary Taxation," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  8. Bill Dupor, 1999. "Keynesian conundrum: multiplicity and time consistent stabilization," Discussion Paper / Institute for Empirical Macroeconomics 131, Federal Reserve Bank of Minneapolis. [Downloadable!]
  9. Leonard J. Mirman & Kevin Reffett & John Stachurski, 2004. "Some Stability Results for Markovian Economic Semigroups," Department of Economics - Working Papers Series 902, The University of Melbourne. [Downloadable!]
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  10. Joe Haslag & Mark G. Guzman & Pia M. Orrenius, 2003. "A Role for Sunspots in Explaining Endogenous Fluctutations in Illegal Immigration," Working Papers 0312, Department of Economics, University of Missouri. [Downloadable!]
  11. Satyajit Chatterjee & Russell Cooper & B. Ravikumar, 1993. "Participation Dynamics: Sunspots and Cycles," NBER Working Papers 3438, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Rizzo, Mario J., 1991. "Equilibrium Visions," Working Papers 91-58, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
  13. Mark G. Guzman & Joseph H. Haslag & Pia M. Orrenius, 2003. "A role for government policy and sunspots in explaining endogenous fluctuations in illegal immigration," Working Papers 03-05, Federal Reserve Bank of Dallas. [Downloadable!]
  14. Willem H. Buiter & Paolo A. Pesenti, 1990. "Rational Speculative Bubbles in an Exchange Rate Target Zone," NBER Working Papers 3467, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  15. Pengfei Wang & Yi Wen, 2007. "Imperfect competition and indeterminacy of aggregate output," Working Papers 2006-017, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
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