Home > Working Papers

Working Paper 2007-033B

Search | View by Year | View by Category | View by Author

"Incomplete Information and Self-fulfilling Prophecies"
by Pengfei Wang, and Yi Wen

This paper shows that incomplete information can be a rich source of self-fulfilling business cycles. This is demonstrated in a standard dynamic general equilibrium model of monopolistic competition à la Dixit-Stiglitz. In the absence of fundamental shocks, the model has a unique certainty (fundamental) equilibrium. But there are also multiple stochastic (sunspots) equilibria that are not mere randomizations over fundamental equilibria. Thus, sunspots can exist in infinite-horizon models with a unique saddle-path steady state. In contrast to the recent sunspots literature (e.g., Benhabib and Farmer, 1994), sunspots are robust to parameters associated with production technologies and preferences.

Full Text - Acrobat PDF (337k)

Notify Me of Updates for:
Category > Monetary Policy/Macroeconomics
Author > Yi Wen