Sunspot Equilibria in Infinite Horizon Competitive Economics

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This project contributes to our understanding of the causes of macroeconomic instability. It investigates the conditions under which sunspot equilibria-- rational expectations equilibria in which the allocation of resources responds to random events of no intrinsic significance-- exist in a variety of infinite horizon competitive models. This is an important line of research because sunspot equilibria imply that agents' beliefs can be self-fulfilling and that competitive equilibria can be indeterminate and unstable. Although young, the investigator is considered one of the best researchers studying sunspot equilibria. He is capable of accomplishing the goals of this project. Issues to be addresed include the role of absence of contingent claims markets, the role of finite as opposed to infinite horizons over which agents optimize, and the role of restrictions upon borrowing against future income, in allowing sunspot equilibrium fluctuations to occur. Particular emphasis is given to models of interest to monetary theory-- overlapping generations models, cash-in-advance models, and models where money is held to smooth income fluctuations. Alternative monetary policy regimes are compared as to whether they allow endogenous fluctuations of this kind or not.