Stable Sunspot Equilibira in a Cash-in-Advance Economy

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Date

2002-10-25

Authors

Evans, George W., 1949-
Honkapohja, Seppo, 1951-
Marimon, Ramon, 1953-

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Journal ISSN

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Publisher

University of Oregon, Dept. of Economics

Abstract

We develop a monetary model with flexible supply of labor, cash in advance constraints and government spending financed by seignorage. This model has two regimes. One regime is conventional with two steady states. The other regime has a unique steady state which can be determinate or indeterminate. In the latter case there exist sunspot equilibria which are stable under adaptive learning, taking the form of noisy finite state Markov processes at resonant frequencies. For a range of parameter values, a sufficient reduction in government purchases will eliminate these equilibria.

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Keywords

Indeterminacy, Learnability, Expectational stability, Endogenous fluctuations, Seignorage (Finance), Mathematical and quantitative methods, Microeconomics, Macroeconomics and monetary economics

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