Intrinsic Uncertainty and Extraneous Uncertainty: Sunspot Equilibria and Periodic Cycles under Fundamental Shocks
This paper investigates how some intrinsic uncertainty will affect the existence of sunspot equilibria and deterministic cycles in a simple overlapping generations model. In the model, there exists an intrinsic uncertainty under which each individual independently has a small probability of losing comsumption goods. Because of the law of large numbers, this intrinsic unvertainty causes no fundamental macroeconomic fluctuation. However, under some parameters, it can change the dynamic stability. Thus, the model may have both stationary sunspot equilibria and deterministic cycles even if the degree of relative risk aversion is small. In particular, these sunspot equilibria and deterministic cycles can exist even if the probability of loss is negligible.
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|Date of creation:||Nov 1993|
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