Are Sunspots Necessary?
In this paper, the author shows the existence of stationary rational expectations equilibria in a simple, two-island, overlapping-generations model of the type first considered by Robert E. Lucas, Jr., in which all uncertainty is endogenous. The result is obtained by first constructing "sunspot" equilibria on each island separately and then using the equilibrium pricing equations to eliminate the sunspot variable. In the resulting equilibrium, each island's prices serve as the sunspot for the other island. The constructed equilibrium is nontrivially stochastic. Copyright 1989 by University of Chicago Press.