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Price Level Volatility: A Simple Model of Money Taxes and Sunspots

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  • Bhattacharya, Joydeep
  • Guzman, Mark G.
  • Shell, Karl

Abstract

We investigate sunspot equilibria in a static, one-commodity model with taxes and transfers denominated in money units. Volatility in this economy is purely monetary, since the only uncertainty is about the price level. We construct simple, robust examples of sunspot equilibria that are not mere randomizations over certainty equilibria. We also identify the source of these SSEs: equilibrium in the securities market is determined as if there were no restricted consumers and the unrestricted consumers face intrinsic uncertainty. Perfect securities markets eliminate allocation uncertainty, but they exacerbate price-level volatility.
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  • Bhattacharya, Joydeep & Guzman, Mark G. & Shell, Karl, 1998. "Price Level Volatility: A Simple Model of Money Taxes and Sunspots," Journal of Economic Theory, Elsevier, vol. 81(2), pages 401-430, August.
  • Handle: RePEc:eee:jetheo:v:81:y:1998:i:2:p:401-430
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    References listed on IDEAS

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    1. Ghiglino, Christian & Shell, Karl, 2000. "The Economic Effects of Restrictions on Government Budget Deficits," Journal of Economic Theory, Elsevier, vol. 94(1), pages 106-137, September.
    2. Balasko, Yves, 1983. "Extrinsic uncertainty revisited," Journal of Economic Theory, Elsevier, vol. 31(2), pages 203-210, December.
    3. Gaetano Antinolfi & Todd Keister, 1998. "Options and sunspots in a simple monetary economy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 11(2), pages 295-315.
    4. Eric O'N. Fisher, 1996. "On exchange rates and efficiency (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(2), pages 267-281.
    5. Shell, Karl & Wright, Randall, 1993. "Indivisibilities, Lotteries, and Sunspot Equilibria," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(1), pages 1-17, January.
    6. Yves Balasko & David Cass & Karl Shell, 1995. "Market Participation and Sunspot Equilibria," Review of Economic Studies, Oxford University Press, vol. 62(3), pages 491-512.
    7. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April.
    8. Esteban Joan & Mitra Tapan & Ray Debraj, 1994. "Efficient Monetary Equilibrium: An Overlapping Generations Model with Nonstationary Monetary Policies," Journal of Economic Theory, Elsevier, vol. 64(2), pages 372-389, December.
    9. Werner, Jan, 1985. "Equilibrium in economies with incomplete financial markets," Journal of Economic Theory, Elsevier, vol. 36(1), pages 110-119, June.
    10. Malinvaud, E, 1973. "Markets for an Exchange Economy with Individual Risks," Econometrica, Econometric Society, vol. 41(3), pages 383-410, May.
    11. James Peck & Karl Shell, 1991. "Market Uncertainty: Correlated and Sunspot Equilibria in Imperfectly Competitive Economies," Review of Economic Studies, Oxford University Press, vol. 58(5), pages 1011-1029.
    12. Goenka Aditya, 1994. "Rationing and Sunspot Equilibria," Journal of Economic Theory, Elsevier, vol. 64(2), pages 424-442, December.
    13. Karl Shell & Aditya Goenka, 1997. "Robustness of sunspot equilibria," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 10(1), pages 79-98.
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    Cited by:

    1. Wallace, Neil, 1998. "Introduction to Modeling Money and Studying Monetary Policy," Journal of Economic Theory, Elsevier, vol. 81(2), pages 223-231, August.
    2. Guzman, Mark G. & Haslag, Joseph H. & Orrenius, Pia M., 2003. "A role for government policy and sunspots in explaining endogenous fluctuations in illegal immigration," Working Papers 0305, Federal Reserve Bank of Dallas.
    3. Keister, Todd, 1998. "Money Taxes and Efficiency When Sunspots Matter," Journal of Economic Theory, Elsevier, vol. 83(1), pages 43-68, November.
    4. Calvet, Laurent E., 2001. "Incomplete Markets and Volatility," Journal of Economic Theory, Elsevier, vol. 98(2), pages 295-338, June.
    5. Kang, Minwook, 2015. "Price-level volatility and welfare in incomplete markets with sunspots," Journal of Mathematical Economics, Elsevier, vol. 56(C), pages 58-66.
    6. Minwook KANG, 2014. "Sunspots and Inflation-indexed Bonds," Economic Growth Centre Working Paper Series 1401, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.
    7. Mark G. Guzman & Joseph H. Haslag & Pia M. Orenius, 2013. "Government Policy under Price Uncertainty: A Source of Volatility in Illegal Immigration," Economics & Management Discussion Papers em-dp2013-05, Henley Business School, Reading University.
    8. Joe Haslag & Mark G. Guzman & Pia M. Orrenius, 2003. "A Role for Sunspots in Explaining Endogenous Fluctutations in Illegal Immigration," Working Papers 0312, Department of Economics, University of Missouri.

    More about this item

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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