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Pareto optimal improvements for sunspots: The golden rule as a target for stabilization

  • Subir K. Chattopadhyay


    (Departamento Fundamentos del AnÂlisis EconÕmico, Universidad de Alicante, E-03071 Alicante, SPAIN; e-mail:

The stationary sunspot equilibria of a simple one good OLG economy are considered. These equilibria are known to be suboptimal. We show that, for any such equilibrium allocation, there always exists a Pareto optimal improvement which has the additional property of reaching the Golden Rule in finite time, i.e., the monetary steady state acts as a target. We also show that, in general, periodic allocations cannot be used as targets. The result is interpreted as a welfare theoretical justification for stabilization policy.

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Article provided by Springer in its journal Economic Theory.

Volume (Year): 8 (1996)
Issue (Month): 1 ()
Pages: 123-135

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Handle: RePEc:spr:joecth:v:8:y:1996:i:1:p:123-135
Note: Received: November 15, 1993; revised version October 19, 1994
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