Stable Sunspot Equilibria in a Cash-in-Advance Economy

George William Evans (), Seppo Mikko Sakari Honkapohja () and Ramon Marimon

Advances in Macroeconomics, 2007, vol. 7, issue 1, pages 1165-1165

Abstract: We analyze a monetary model with flexible labor supply, cash-in-advance constraints, and seigniorage- and tax-financed government spending. If the intertemporal elasticity of substitution of labor is greater than one, both determinate and indeterminate steady states exist. If the elasticity is less than one, there is a unique steady state, which can be indeterminate. Only in the latter case do there exist sunspot equilibria that are stable under adaptive learning. A sufficient reduction in government purchases or increase in tax rates eliminates the sunspot equilibria in many cases. However, raising taxes enough to balance the budget can fail to achieve determinacy.

Keywords: indeterminacy; learnability; expectational stability; seigniorage; endogenous fluctuations (search for similar items in EconPapers)
JEL-codes: C62 (search for similar items in EconPapers)
Note: oai:bepress:bejm-1165
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Related works:
Working Paper: Stable Sunspot Equilibria in a Cash-in-Advance Economy (2001)
Working Paper: Stable Sunspot Equilibira in a Cash-in-Advance Economy (2005)
Working Paper: Stable Sunspot Equilibria in a Cash-in-Advance Economy (2005)
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