The genesis of expectations and of sunspot equilibria

Abstract

The existence — under certain conditions — of sunspot equilibria in overlapping generations models is a well-known theoretical result, but a lot of research has still to be made to understand whether and how such equilibria may occur as a consequence of a dynamic process.

In this paper, we explore a model with individuals having simple utility functions and discover situations in which the dynamic processes of expectations and observed prices do not converge in spite of the existence of static equilibria. In other words, unfounded beliefs do still have a permanent influence on the real economy but induce erratic evolutions.

The first version of the paper was presented at the European Economic Association meeting in Cambridge (August 1991). The authors are grateful to the referees for useful comments.