From coordination devices to coordination failures: on the changing epistemology of sunspots since the 1970s

Aurélien Saïdi

The European Journal of the History of Economic Thought, 2024, vol. 31, issue 2, 277-300

Abstract: The widespread adoption of the rational expectations hypothesis in macroeconomics since the 1970s often overlooked the issue of coordinating individual decisions, particularly regarding expectations. How is common knowledge, essential for rational expectations equilibrium, established? When common knowledge supports multiple equilibria, how do expectations converge to a specific one? These questions have been central to sunspot literature, which emerged in the early 1980s. Initially regarded as essential coordination devices by David Cass and Karl Shell, the epistemological status of sunspots evolved with the introduction of competing models and the transition from overlapping generations to infinitely lived agent frameworks. Recently, advancements in sunspot theory, especially in financial crises and experimental economics, have begun to rehabilitate the original interpretation of sunspots as coordination devices. This evolution reflects the ongoing debate about expectation formation and coordination in macroeconomic theory.

Date: 2024
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DOI: 10.1080/09672567.2024.2329047

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