A BEJM Advances article.

Abstract

We analyze a monetary model with flexible labor supply, cash-in-advance constraints, and seigniorage- and tax-financed government spending. If the intertemporal elasticity of substitution of labor is greater than one, both determinate and indeterminate steady states exist. If the elasticity is less than one, there is a unique steady state, which can be indeterminate. Only in the latter case do there exist sunspot equilibria that are stable under adaptive learning. A sufficient reduction in government purchases or increase in tax rates eliminates the sunspot equilibria in many cases. However, raising taxes enough to balance the budget can fail to achieve determinacy.

Submitted: September 18, 2003 · Accepted: December 14, 2006 · Published: January 22, 2007

Recommended Citation

Evans, George W.; Honkapohja, Seppo M.S.; and Marimon, Ramon (2007) "Stable Sunspot Equilibria in a Cash-in-Advance Economy," The B.E. Journal of Macroeconomics: Vol. 7 : Iss. 1 (Advances), Article 3.
DOI: 10.2202/1935-1690.1165
Available at: http://www.bepress.com/bejm/vol7/iss1/art3