We examine when "sunspots" (uncertainty that has no influence on endowments, preferences, or technology) can affect equilibrium in a simple two-period, two-commodity, two-class economy. We find that such an effect is possibly only if the signals (random variables) that different agents observe are imperfectly correlated (neither perfectly correlated nor independent) and at least one commodity is a Giffen good. For two special cases we characterize the set of equilibria due to sunspots. We conclude by showing the intimate connection between the sunspot equilibria of our finite horizon model and those of the overlapping generations literature.
ASJC Scopus subject areas
- Economics and Econometrics