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Regime-Switching Sunspot Equilibria in a One-Sector Growth Model with Aggregate Decreasing Returns and Small Externalities

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  • Takashi Kamihigashi

    (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)

Abstract

This paper shows that regime-switching sunspot equilibria easily arise in a one-sector growth model with aggregate decreasing returns and arbitrarily small externalities. We construct a regime-switching sunspot equilibrium under the assumption that the utility function of consumption is linear. We also construct a stochastic optimal growth model whose optimal process turns out to be a regime-switching sunspot equilibrium of the original economy under the assumption that there is no capital externality. We illustrate our results with numerical examples.

Suggested Citation

  • Takashi Kamihigashi, 2016. "Regime-Switching Sunspot Equilibria in a One-Sector Growth Model with Aggregate Decreasing Returns and Small Externalities," Discussion Paper Series DP2016-21, Research Institute for Economics & Business Administration, Kobe University.
    • Handle: RePEc:kob:dpaper:dp2016-21
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    File URL: https://www.rieb.kobe-u.ac.jp/academic/ra/dp/English/DP2016-21.pdf
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    References listed on IDEAS

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    1. Abad, Nicolas & Lloyd-Braga, Teresa & Modesto, Leonor, 2020. "The failure of stabilization policy: Balanced-budget fiscal rules in the presence of incompressible public expenditures," Journal of Economic Dynamics and Control, Elsevier, vol. 120(C).

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