Stable Sunspot Equilibria in a Cash-in-Advance Economy

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

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We analyze a monetary model with flexible labor supply, cash-inadvance constraints and seigniorage-financed government deficits. If the intertemporal elasticity of substitution of labor is greater than one, there are two steady states, one determinate and the other indeterminate. 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 can in many cases eliminate the sunspot equilibria while raising consumption/labor taxes even enough to balance the budget may fail to achieve determinacy.

Keywords: Indeterminacy; learnability; expectational stability; endogenous fluctuations; seigniorage (search for similar items in EconPapers)
JEL-codes: C62 D83 D84 E31 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2004-02
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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)
Journal Article: Stable Sunspot Equilibria in a Cash-in-Advance Economy (2007)
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