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Functional Sunspot Equilibria

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Author Info
Shurojit Chatterji () (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))
Subir Chattopadhyay (Universidad de Alicante, El Colegio de Mexico)

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Abstract

Consider a one step forward looking self-referential model with a one dimensional state variable where the information set available to agents when they make their forecast for the next period includes the current realization of an extrinsic random process but does not include the current value of the state variable. Agents thus iterate twice on their beliefs about the law of motion of the system to generate their forecasts; this is as in models of learning and in contrast to the specification considered in the literature on sunspot equilibria where the extrinsic random process is the state variable. This paper demonstrates (and characterizes the conditions for) the existence of self-fulfilling stochastic equilibria with bounded fluctuations driven purely by extrinsic beliefs for the model described above; furthermore, the existence of these equilibria is shown to be independent of the determinacy properties of the perfect foresight dynamics of the model. (Traditional sunspot equilibria appear as a special case of the formulation of the paper). The paper indicates that the problem of multiplicity of rational expectations equilibria in these models is more severe than believed erstwhile.

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File URL: http://ftp.itam.mx/pub/academico/inves/chatterji/02-01.pdf
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Publisher Info
Paper provided by Centro de Investigacion Economica, ITAM in its series Working Papers with number 0201.

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Length: 19 pages
Date of creation: Jan 2002
Date of revision: Nov 2003
Handle: RePEc:cie:wpaper:0201

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Related research
Keywords: extrinsic uncertainty; stochastic equilibria;

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References listed on IDEAS
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  1. Chattopadhyay, Subir & Gottardi, Piero, 1999. "Stochastic OLG Models, Market Structure, and Optimality," Journal of Economic Theory, Elsevier, vol. 89(1), pages 21-67, November. [Downloadable!] (restricted)
    Other versions:
  2. James Peck, 1986. "On the Existence of Sunspot Equilibria in an Overlapping Generations Model," Discussion Papers 678, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
    Other versions:
  3. Azariadis, Costas & Guesnerie, Roger, 1986. "Sunspots and Cycles," Review of Economic Studies, Blackwell Publishing, vol. 53(5), pages 725-37, October. [Downloadable!] (restricted)
  4. Rao Aiyagari, S. & Peled, Dan, 1991. "Dominant root characterization of Pareto optimality and the existence of optimal equilibria in stochastic overlapping generations models," Journal of Economic Theory, Elsevier, vol. 54(1), pages 69-83, June. [Downloadable!] (restricted)
  5. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April. [Downloadable!] (restricted)
  6. Azariadis, Costas, 1981. "Self-fulfilling prophecies," Journal of Economic Theory, Elsevier, vol. 25(3), pages 380-396, December. [Downloadable!] (restricted)
  7. Michael Magill & Martine Quinzii, 2003. "Indeterminacy of equilibrium in stochastic OLG models," Economic Theory, Springer, vol. 21(2), pages 435-454, 03. [Downloadable!] (restricted)
  8. Grandmont Jean-michel & Laroque G, 1990. "Economic dynamics with learning : some instability examples," CEPREMAP Working Papers (Couverture Orange) 9007, CEPREMAP.
  9. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, vol. 48(2), pages 337-368, August. [Downloadable!] (restricted)
  10. Karl Shell & Aditya Goenka, 1997. "Robustness of sunspot equilibria," Economic Theory, Springer, vol. 10(1), pages 79-98. [Downloadable!] (restricted)
  11. Chiappori, P.A. & Guesnerie, R., 1993. "Rational Random Walks," DELTA Working Papers 93-07, DELTA (Ecole normale supérieure).
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  12. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, vol. 4(3), pages 345-80.
  13. Julio DÂvila, 1997. "Sunspot fluctuations in dynamics with predetermined variables," Economic Theory, Springer, vol. 10(3), pages 483-495. [Downloadable!] (restricted)
  14. Bloise, Gaetano, 2004. "A note on sunspot equilibrium in sequential economies," Research in Economics, Elsevier, vol. 58(1), pages 59-74, March. [Downloadable!] (restricted)
  15. Grandmont, Jean-Michel, 1986. "Stabilizing competitive business cycles," Journal of Economic Theory, Elsevier, vol. 40(1), pages 57-76, October. [Downloadable!] (restricted)
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