Existence Of Sunspot Equilibria Research Articles

Habit Persistence, Currency Competition and Sunspot Equilibria

This paper cites the concept of consumption habit persistence and sunspot equilibria with uncertainty for analyzing the issue of currency competition to discuss the necessity of Gresham's Law and provide a complement of explanation to the euro exchange rate movements. We study the economy in one-good, two-currency Brock model with perfect currency substitution in discrete time. With habit persistence, we show that the optimal holding of currency asset is affected by the elasticity of intertemporal substitution. Besides, the higher-growth-rate currency does not always dominate the other currency in the long run. The Gresham-law result obtained in the deterministic model could not be true in a stationary sunspot equilibrium with a first-order Markov extrinsic uncertainty process. The existence of sunspot equilibria expresses another situation of currency competition depending on the possibility of people's expectations and supports complementally the investor-emotion view of the empirical studies in the currency-asset holding and the euro exchange rate movements.

Multiple Equilibria in Heterogeneous Expectations Models

Abstract This paper fills an important gap in the literature on determinacy and existence of sunspot equilibria in stochastic linear self-referential models. The results in this paper demonstrate that heterogeneity in expectations may alter a model's regions of determinacy. We show how to associate with a heterogeneous expectations model (HE-model) a rational expectations model (ARE-model), the solutions to which are the equilibria of the HE-model. This association recasts the analysis of determinacy in the HE-model to analysis of determinacy in the ARE-model. We proceed to study a forward looking model and find that the stability properties of rational expectations models may not be robust. In particular, we present new results showing that in some models even a very small fraction of non-rational agents may preclude rational agents from coordinating on sunspots. Also, we present parameterizations of the model in which sunspots exist in the heterogeneous model when they do not exist in the rational expectations version of the model.

Existence of Sunspot Equilibria and Uniqueness of Spot Market Equilibria: The Case of Intrinsically Complete Markets

We consider economies with additively separable utility functions and give conditions for the two-agents case under which the existence of sunspot equilibria is equivalent to the occurrence of the transfer paradox. This equivalence enables us to show that sunspots cannot matter if the initial economy has a unique spot market equilibrium and there are only two commodities or if the economy has a unique equilibrium for all distributions of endowments induced by asset trade. For more than two agents the equivalence breaks and we give an example for sunspot equilibria even though the economy has a unique equilibrium for all distributions of endowments induced by asset trade.

Sunspot fluctuations in dynamics with predetermined variables

In this paper, I study the existence of Sunspot Equilibria in a general framework whose dynamics allow for the presence of predetermined variables in the system. The main motivation for this research comes from the fact that previous studies did not allow for such predetermined variables which, nevertheless, appear quite naturally in economic models. I show, for a non-negligible subset of dynamics with predetermined variables verifying usual assumptions, the existence of Stationary Sunspot Equilibria fluctuating between an arbitrary finite number of states arbitrarily close to a steady state.

Continuous-Time Sunspot Equilibria and Dynamics in a Model of Growth

This article is concerned with the existence of sunspot equilibria in a continuous-time growth setting. It brings alternative approaches in the self-fulfilling prophecies literature: continuous time, global dynamics, and non-stationarity. The main contribution of the use of continuous-time methods is to allow for a complete understanding of the global dynamical properties of these stochastic equilibria within a non-stationary economy. In this model, fluctuations in growth rates occur through a self-fulfilling prophecies mechanism.Journal of Economic LiteratureClassification Numbers: E12, E32, O41.

Monetary confidence and asset prices

Three issues are studied in this paper: the existence of sunspot equilibria; the excessive volatility of asset prices; and the possibility that assets may be undervalued relative to their market fundamentals. We show that (i) stationary sunspot equilibria exist in a very general environment; (ii) asset prices may fluctuate despite a constant stream of dividends; and (iii) assets may be undervalued. JEL: 021, 023, 131.

Dynamic determinacy and the existence of sunspot equilibria

This paper relates the existence of stationary sunspot equilibria in the vicinity of a conventional stationary state to the phase diagram surrounding the latter. We find that the local condition required for a unique equilibrium path returning to the stationary state following any slight disturbance of initial conditions is also sufficient to exclude stationary sunspot equilibria in the stationary state's immediate vicinity. In that sense, an eigenvalue condition familiar from dynamic analysis can tell us something about the possibilities of local sunspot activity as well.

On the existence of sunspot equilibria in an overlapping generations model

The existence of sunspot equilibria is shown in a one-commodity overlapping generations model without stationarity assumptions on preferences, endowments, or nominal taxes. The essential assumption is that there is a continuum of perfect foresight equilibria. The technique is also useful for constructing stationary sunspot equilibria when they exist. Consumption in a sunspot equilibrium is shown to lie within the range consistent with perfect foresight.