Sunspot Equilibria in a Production Economy: Do Rational Animal Spirits Cause Overproduction?

20 Pages Posted: 27 Apr 2009

See all articles by Atsushi Kajii

Atsushi Kajii

Institute of Economic Research, Kyoto University; Singapore Management University

Date Written: 2008-09-30

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.

Suggested Citation

Kajii, Atsushi, Sunspot Equilibria in a Production Economy: Do Rational Animal Spirits Cause Overproduction? (2008-09-30). Japanese Economic Review, Vol. 60, Issue 1, pp. 35-54, March 2009, Available at SSRN: https://ssrn.com/abstract=1378281 or http://dx.doi.org/10.1111/j.1468-5876.2008.00469.x

Atsushi Kajii (Contact Author)

Institute of Economic Research, Kyoto University ( email )

Yoshida-Honmachi
Sakyo-ku
Kyoto 606-8501
JAPAN

HOME PAGE: http://www.kier.kyoto-u.ac.jp/~kajii/

Singapore Management University ( email )

School of Economics
90 Stamford Road
Singapore, 178903
Singapore

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