Stable Sunspot Equilibria in a Cash-in-Advance Economy

George W. Evans, Seppo M.S. Honkapohja and Ramon Marimon
Additional contact information
George W. Evans: University of Oregon
Seppo M.S. Honkapohja: University of Cambridge
Ramon Marimon: European University Institute and UPF-CREi

The B.E. Journal of Macroeconomics, 2007, vol. 7, issue 1

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 D83 D84 E31 E32 (search for similar items in EconPapers)
Date: 2007
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