Pareto optimal improvements for sunspots: The golden rule as a target for stabilization

Subir Chattopadhyay

Economic Theory, 1996, vol. 8, issue 1, 123-135

Abstract: The stationary sunspot equilibria of a simple one good OLG economy are considered. These equilibria are known to be suboptimal. We show that, for any such equilibrium allocation, there always exists a Pareto optimal improvement which has the additional property of reaching the Golden Rule in finite time, i.e., the monetary steady state acts as a target. We also show that, in general, periodic allocations cannot be used as targets. The result is interpreted as a welfare theoretical justification for stabilization policy.

Date: 1996
Note: Received: November 15, 1993; revised version October 19, 1994
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