Title

Sunspot equilibria in a production economy: Do rational animal spirits cause overproduction?

Publication Type

Journal Article

Publication Date

3-2009

Abstract

We study a standard two-period economy with one nominal bond and one firm. The firm finances the input with the nominal bond in the first period and its profits are distributed to the shareholders in the second period. We show that in the neighbourhood of each efficient equilibrium, a sunspot equilibrium also exists. It is shown that the equilibrium interest rate is lower than the efficient level and that there is overproduction in the sunspot equilibrium, under some conditions. However, there is no sunspot equilibrium if the profit share of the firm can be traded as well as the bond.

Keywords

economic theory, interest rate, modeling, stock market

Discipline

Economic Theory

Research Areas

Economic Theory

Publication

Japanese Economic Review

Volume

60

Issue

1

First Page

35

Last Page

54

ISSN

1352-4739

Identifier

10.1111/j.1468-5876.2008.00469.x

Publisher

Wiley: 24 months

Additional URL

http://dx.doi.org/10.1111/j.1468-5876.2008.00469.x

Comments

This paper was prepared for an invited lecture at the autumn meeting of the Japanese Economic Association held at Kinki University on 15 September 2008.

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