The stationary sunspot equilibria of a simple OLG economy with heterogeneous agents areconsidered. 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 insuch an environment.The main result is that knowledge of (a) the sunspot equilibrium net trades, (b) weak interval typeinformation on two parameters, and (c) weak set type information on the location of some optimalstationary allocation, is sufficient to induce a competitive location of some optimal stationaryallocation, is sufficient to induce a competitive equilibrium which is a pareto optimal Paretoimprovement over the sunspot allocation which has the further property of reaching a Pareto optimalstationary allocation in finite time.The result are interpreted as demonstrating that in a simple model with a sunspot environment, policyis very effective and that welfare economic considerations lead to stabilization.
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Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number
1999-02.
Find related papers by JEL classification: D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
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