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Stable Sunspot Equilibria in a Cash-in-Advance Economy

Author

Listed:
  • Evans George W

    (University of Oregon)

  • Honkapohja Seppo M.S.

    (University of Cambridge)

  • Marimon Ramon

    (European University Institute and UPF-CREi)

Abstract

We analyze a monetary model with flexible labor supply, cash-in-advance constraints, and seigniorage- and tax-financed government spending. If the intertemporal elasticity of substitution of labor is greater than one, both determinate and indeterminate steady states exist. If the elasticity is less than one, there is a unique steady state, which can be indeterminate. Only in the latter case do there exist sunspot equilibria that are stable under adaptive learning. A sufficient reduction in government purchases or increase in tax rates eliminates the sunspot equilibria in many cases. However, raising taxes enough to balance the budget can fail to achieve determinacy.

Suggested Citation

  • Evans George W & Honkapohja Seppo M.S. & Marimon Ramon, 2007. "Stable Sunspot Equilibria in a Cash-in-Advance Economy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-38, January.
  • Handle: RePEc:bpj:bejmac:v:7:y:2007:i:1:n:3
    DOI: 10.2202/1935-1690.1165
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    References listed on IDEAS

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    6. George W. Evans & Seppo Honkapohja, 2001. "Expectational Stability of Resonant Frequency Sunspot Equilibria," CESifo Working Paper Series 497, CESifo.
    7. Evans, George W. & Honkapohja, Seppo, 2003. "Existence of adaptively stable sunspot equilibria near an indeterminate steady state," Journal of Economic Theory, Elsevier, vol. 111(1), pages 125-134, July.
    8. Evans, Geroge W & Honkapohja, Seppo & Romer, Paul, 1998. "Growth Cycles," American Economic Review, American Economic Association, vol. 88(3), pages 495-515, June.
    9. Marimon Ramon & Spear Stephen E. & Sunder Shyam, 1993. "Expectationally Driven Market Volatility: An Experimental Study," Journal of Economic Theory, Elsevier, vol. 61(1), pages 74-103, October.
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    14. Evans George W. & Honkapohja Seppo, 1994. "On the Local Stability of Sunspot Equilibria under Adaptive Learning Rules," Journal of Economic Theory, Elsevier, vol. 64(1), pages 142-161, October.
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    Citations

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    Cited by:

    1. George W. Evans & Seppo Honkapohja, 2009. "Expectations, Learning and Monetary Policy: An Overview of Recent Research," Central Banking, Analysis, and Economic Policies Book Series, in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 2, pages 027-076, Central Bank of Chile.
    2. Dixon, Huw & Pourpourides, Panayiotis M., 2016. "On imperfect competition with occasionally binding cash-in-advance constraints," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 72-85.
    3. Evans, George W. & McGough, Bruce, 2005. "Monetary policy, indeterminacy and learning," Journal of Economic Dynamics and Control, Elsevier, vol. 29(11), pages 1809-1840, November.
    4. repec:zbw:cfswop:wp200337 is not listed on IDEAS
    5. Pedro Gil, 2013. "Animal spirits and the composition of innovation in a lab-equipment R&D model with transition," Journal of Economics, Springer, vol. 108(1), pages 1-33, January.
    6. Seonghoon Cho & Antonio Moreno, 2008. "Expectational Stability in Multivariate Models," Faculty Working Papers 06/08, School of Economics and Business Administration, University of Navarra.
    7. Stefano Eusepi, 2005. "Comparing forecast-based and backward-looking Taylor rules: a "global" analysis," Staff Reports 198, Federal Reserve Bank of New York.
    8. Athanasios Orphanides & John Williams, 2004. "Imperfect Knowledge, Inflation Expectations, and Monetary Policy," NBER Chapters, in: The Inflation-Targeting Debate, pages 201-246, National Bureau of Economic Research, Inc.
    9. Pedro Rui Mazeda Gil, 2009. "Animal Spirits and the Composition of Innovation in a Lab-Equipment R&D Model," FEP Working Papers 336, Universidade do Porto, Faculdade de Economia do Porto.
    10. Evans, George W. & Honkapohja, Seppo, 2003. "Existence of adaptively stable sunspot equilibria near an indeterminate steady state," Journal of Economic Theory, Elsevier, vol. 111(1), pages 125-134, July.
    11. Arifovic, Jasmina & Evans, George W. & Kostyshyna, Olena, 2020. "Are sunspots learnable? An experimental investigation in a simple macroeconomic model," Journal of Economic Dynamics and Control, Elsevier, vol. 110(C).
    12. repec:zbw:cfswop:wp200340 is not listed on IDEAS
    13. Jasmina Arifovic, 2019. "Evolution of sunspot like behavior in the agent based economies of bank runs," Journal of Evolutionary Economics, Springer, vol. 29(1), pages 365-389, March.

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    More about this item

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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