Karl Shell on sunspot equilibrium
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In a sunspot equilibrium (SE), the allocation of resources depends on some purely extrinsic random variable - a random variable that has no effect on the fundamentals. The SE concept provides a basis for rational-expectations (RE) models of excess market volatility. The best way to analyze bank runs and related financial fragilities is as a sunspot equilibrium outcome. The current financial meltdown is largely financial and partly sunspot driven. Sunspots can improve resource allocation in non-convex economies. Any one of the following departures from the basic Walrasian model allows there to be proper SE: · The "double infinity" of consumers and dated commodities (as naturally arises in infinite-horizon OG models). See Shell JPE (1971), Shell (1977) and Cass and Shell (1989). · Restrictions on market participation (as naturally arise in OG models). See Shell (1977) and Cass and Shell (1983). · Incomplete markets (as naturally arise in OG models and elsewhere). See Shell (1977) and the work of David Cass and others. · Asymmetric information. See Peck and Shell (1985, 1991) and Aumann, Peck and Shell (1988). See also mechanism design problems such as Peck and Shell (2003, 2010). · Imperfect competition (as modeled, e.g. by market games). See Peck and Shell (1985, 1991). · Consumption or production externalities, as introduced by Steve Spear and successfully explored in applied work on economic fluctuations by Jess Benhabib, Roger Farmer, Stephanie Schmitt-Grohé, Yi Wen and others. · Nonconvexities in consumption or production. See Shell and Wright (1993) Goenka and Shell (1997), and Garratt, Keister, Qin, and Shell (2002), and Garratt, Keister, and Shell (2004). · Monetary indeterminacy. See Bhattacharya, Guzman and Shell (1998) for a very simple model that elucidates "the fundamental source of sunspot equilibria". ·
"Monnaie et allocation intertemporelle"
[title and abstract in French, text in English] mimeo., Séminaire
Roy-Malinvaud, Centre National de la Recherche Scientifique, Paris,
November 21, 1977. Translation to be published in Macroeconomic Dynamics
as a Vintage Unpublished Paper. ·
"Les
tâches solaires ont-elles de l'importance?"
(with David Cass), Cahiers du
séminaire d'économétrie,
24, 1982, 93-127. This is slightly more general than the JPE version. ·
"Do
Sunspots Matter?" (with David Cass), Journal
of Political Economy, Vol. 91(2), April 1983, 193-227. Reprinted in General
Equilibrium Theory (G. Debreu, ed.), The International Library of Critical Writings
in Economics 67, ·
"Market
Uncertainty: Sunspot Equilibria in Imperfectly
Competitive Economies" (with James Peck), Working Paper 85-21,
Center for Analytic Research in Economics and the Social Sciences, University
of Pennsylvania, Philadelphia, July 1985. This is more complete
than the RES version. ·
"Sunspot
Equilibrium" in The New Palgrave: A Dictionary of Economics (J. Eatwell, M. Milgate, and P.
Newman, eds.), Vol. 4, ·
"Asymmetric
Information and Sunspot Equilibria: A Family of
Simple Examples" (with Robert J. Aumann
and James Peck), Working Paper 88-34, Center for Analytic Economics, ·
"Sunspot
Equilibrium in an Overlapping-Generations Economy with an Idealized
Contingent-Commodities Market" (with David Cass), Part 1, Chapter 1
in Economic Complexity: Chaos, Sunspots, Bubbles, and Nonlinearity (W.
Barnett, J. Geweke, and K. Shell, eds.), ·
"On
the Nonequivalence of the Arrow-Securities Game and the
Contingent-Commodities Game" (with James Peck), Part 1, Chapter 4 in
Economic Complexity: Chaos, Sunspots, Bubbles, and Nonlinearity (W.
Barnett, J. Geweke, and K. Shell, eds.), ·
"Market
Uncertainty: Correlated and Sunspot Equilibria in
Imperfectly Competitive Economies" (with James Peck), The Review of Economic Studies, Vol. 58(5),
October 1991, 1011-1029. ·
"Sunspot
Equilibrium" (with Bruce D. Smith), in the New Palgrave Dictionary of Money and Finance (J. Eatwell, M. Milgate, and P.
Newman, eds.), Vol. 3, ·
"Indivisibilities,
Lotteries, and Sunspot Equilibria" (with
Randall D. Wright), Economic Theory, Vol. 3(1), January 1993,
1-17. ·
"Sunspot
Equilibrium" Jacob Marschak Colloquium at
UCLA, November 13, 1992, abstract in Mathematical Social Sciences,
Vol. 26, July 1993, 101. ·
"Further
Evidence of the Necessity of Sunspots" (with Rod J. Garratt), Working Paper in Economics 6-93, Department of
Economics, University of California, Santa Barbara, April 1993. ·
"Market
Participation and Sunspot Equilibria"
(with Yves Balasko and David Cass), The Review of Economic Studies, Vol. 62(3),
No. 212, July 1995, 491-512. Reprinted in Equilibrium (D. ·
"When
Sunspots Don't Matter" (with Aditya Goenka), Economic Theory, Vol. 9(1), January 1997,
169-178. ·
"Robustness
of Sunspot Equilibria" (with Aditya Goenka), Economic
Theory, Vol. 10(1), July 1997, 79-98. ·
"Price
Level Volatility: A Simple Model of Money Taxes and Sunspots" (with Joydeep Bhattacharya and Mark Guzman), Journal of
Economic Theory, Vol. 81(2), August 1998, 401-430.
(doi:10.1006/jeth.1997.2362) ·
"Introduction
to Sunspots and Lotteries" (with Edward C. Prescott), Journal of
Economic Theory, Vol. 107(1), November 2002, 1-10.
(doi:10.1006/jeth.2002.2946) ·
"Equilibrium
Prices when the Sunspot Variable is Continuous" (with Rod Garratt, Todd Keister, and
Cheng-Zon Qin), Journal
of Economic Theory, Vol. 107(1), November 2002, 11-38.
(doi:10.1006/jeth.1999.2634) ·
"Equilibrium
Bank Runs" (with James Peck), Journal of Political Economy,
Vol. 111(1), February 2003, 103-123. ·
"Comparing
Sunspot Equilibrium and Lottery Equilibrium Allocations: The Finite
Case" (with Rod Garratt and Todd Keister), International Economic Review, Vol.
45(2), May 2004, 351-386. (doi:
10.1111/j.1468-2354.2004.00129.x) ·
"General
Equilibrium with Nonconvexities and Money"
(with Guillaume Rocheteau, Peter Rupert, and
Randall Wright), Journal of Economic Theory, Vol. 142(1), September
2008, 294-317. ·
"Sunspot
Equilibrium", The New Palgrave: A Dictionary of Economics, 2nd Edition (L. Blume and · "Could Making Banks Hold Only Liquid Assets Induce Bank Runs?" (with James Peck), Journal of Monetary Economics, forthcoming (Vol. 7:4, May 2010). Proofs and computations are available in the Web Supplement. Sunspot pictures
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