Intrinsic Uncertainty and Extraneous Uncertainty: Sunspot Equilibria and Periodic Cycles under Fundamental Shocks

Shin-ichi Fukuda ()

Discussion Paper Series from Institute of Economic Research, Hitotsubashi University

Abstract: This paper investigates how some intrinsic uncertainty will affect the existence of sunspot equilibria and deterministic cycles in a simple overlapping generations model. In the model, there exists an intrinsic uncertainty under which each individual independently has a small probability of losing comsumption goods. Because of the law of large numbers, this intrinsic unvertainty causes no fundamental macroeconomic fluctuation. However, under some parameters, it can change the dynamic stability. Thus, the model may have both stationary sunspot equilibria and deterministic cycles even if the degree of relative risk aversion is small. In particular, these sunspot equilibria and deterministic cycles can exist even if the probability of loss is negligible.

JEL-codes: E32 E40 (search for similar items in EconPapers)
Date: 1993-11

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Persistent link: http://EconPapers.repec.org/RePEc:hit:hituec:a282

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