Sunspot Fluctuations: A Way Out of the Development Trap?

Sergey Slobodyan
2001 Social Science Research Network  
It is well known that in dynamic general equilibrium economic models equilibrium may be indeterminate. Indeterminacy means that there is a continuum of equilibrium trajectories converging to the same steady state. Very often, the same mechanisms that are responsible for indeterminacy, like increasing returns to scale or market imperfections, lead to existence of multiple steady states, and development traps can arise. On the other hand, indeterminacy often allows construction of rational
more » ... equilibrium as a randomization over di¤erent equilibrium trajectories or equilibria. The purpose of this paper is to study the possibility of "rescuing" an economy from a development trap through sunspot-driven self-ful...lling expectations.
doi:10.2139/ssrn.1514542 fatcat:xsuzofr47ndpnheao4on5ls4uy