The stationary sunspot equilibria of a simple OLG economy with heterogeneous agents are considered. These equilibria are known to be suboptimal. The focus of the paper is on the efficacy, based on welfare economic considerations and informational requirements, of government "policy" in such an environment. The main result is that knowledge of (a) the sunspot equilibrium net trades, (b) weak interval type information on two parameters, and (c) weak set type information on the location of some optimal stationary allocation, is sufficient to induce a competitive location of some optimal stationary allocation, is sufficient to induce a competitive equilibrium which is a pareto optimal Pareto improvement over the sunspot allocation which has the further property of reaching a Pareto optimal stationary allocation in finite time. The result are interpreted as demonstrating that in a simple model with a sunspot environment, policy is very effective and that welfare economic considerations lead to "stabilization".
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Paper provided by Valencia - Instituto de Investigaciones Economicas in its series Papers with number
99-02.
Find related papers by JEL classification: E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization D60 - Microeconomics - - Welfare Economics - - - General
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