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Near Rationality and Sunspot Equilibria

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  • Shin-ichi Fukuda
  • Nobusumi Sagara

Abstract

The purpose of this paper is to investigate how the existence of near-rational agents will affect the existence of sunspots in a simple overlapping generations model of fiat money. In the model, near-rational agents are irrational in the sense that they do not literally maximize all the time. However, these agents are close to rational agents in that the utility difference between rational and near-rational agents is second order for first-order price fluctuations. We show that when these near-rational agents exist, the model may have stationary sunspot equilibria even if the degree of risk aversion is very small. In addition, economic fluctuations under sunspot equilibria cause first order consequences by redistribution intergeneratonal welfare.

Suggested Citation

  • Shin-ichi Fukuda & Nobusumi Sagara, 1994. "Near Rationality and Sunspot Equilibria," Discussion Paper Series a288, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:hituec:a288
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