An Alternative Approach to the Existence of Sunspot Equilibria

19 September 2012
Author: Haim Abraham
Publication Type: Working Paper
JEL Code: D00, D50, D80

This paper offers an alternative approach to the existence of sunspot equilibria. The economy has a single perishable good and fiat money within an overlapping generations framework with two possible extraneous events. The analysis uses the dynamic adjustment of market prices during voluntary trade to establish paths of current spot prices whose limit points are rational expectations equilibria. The paper shows that there is a sub-set of paths whose limit points are self-fulfilling if they are perfectly correlated with extraneous events. It is this sub-set that constitutes sunspot equilibria. Two implications of this approach follow: (a) the likelihood of this existence is generally low; and (b) adding an asset (or a commodity) to the economy invalidates the demonstration of existence.

Working Paper 034
1 January 2006