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Eliminating sunspot effects in overlapping generations models

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  • Burke, Jonathan L.

Abstract

We reappraise the robustness of sunspot effects in overlapping-generations models. Azariadis’s well-known example economies have stationary, deterministic fundamentals (preferences, technologies, and endowments), yet sunspots affect multiple equilibria. And those equilibria are robust to common perturbations of underlying fundamentals. However, we find that judiciously splitting each of Azariadis’s goods into close substitutes eliminates sunspot effects, and the remaining equilibrium is unique and deterministic. Forecasting thus becomes conclusive, and there is no longer a role for government policy to stabilize excess volatility.

Suggested Citation

  • Burke, Jonathan L., 2012. "Eliminating sunspot effects in overlapping generations models," Economics Letters, Elsevier, vol. 117(3), pages 828-830.
    • Handle: RePEc:eee:ecolet:v:117:y:2012:i:3:p:828-830
    DOI: 10.1016/j.econlet.2012.09.003
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    References listed on IDEAS

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    1. Spear, Stephen E. & Srivastava, Sanjay & Woodford, Michael, 1990. "Indeterminacy of stationary equilibrium in stochastic overlapping generations models," Journal of Economic Theory, Elsevier, vol. 50(2), pages 265-284, April.
    2. Azariadis, Costas, 1981. "Self-fulfilling prophecies," Journal of Economic Theory, Elsevier, vol. 25(3), pages 380-396, December.
    3. Jonathan L. Burke, 2009. "Virtual Determinacy in Overlapping Generations Models," Econometrica, Econometric Society, vol. 77(1), pages 235-247, January.
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    Cited by:

    1. Martin Shubik, 2016. "Three Essays on the Theory of Money and Financial Institutions Essay 2: The Exchange Economy, Money, and Markets," Cowles Foundation Discussion Papers 2055, Cowles Foundation for Research in Economics, Yale University.

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    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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