The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Sunspot Equilibrium

  • Karl Shell
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_1362

Abstract

‘Sunspots’ is short for an extrinsic random variable, that is, one that does not affect economic fundamentals but can affect economic outcomes. Sunspots are said to matter when the allocation of resources depends in a non-trivial way on the realization of the sunspot random variable. Sunspot equilibria are instances of ‘excess volatility’. They arise even when expectations are fully rational. Separate sources of sunspot equilibria include unbounded time horizons, incomplete markets, restricted market participation, imperfect competition, non-convexities, externalities, asymmetric information and financial indeterminacy. Sunspot equilibria are typically not mere randomizations over certainty equilibria.

Keywords

Asymmetric information Banking crises Bank runs Bootstrap method Bubbles Business cycle Calibration Contingent commodities Correlated equilibrium Endogenous uncertainty Excess volatility Expectations Extrinsic uncertainty Financial fragility General equilibrium with incomplete markets Imperfect competition Indivisible goods Infinite horizons Intrinsic uncertainty Jevons, W. S. Law of large numbers Learning Lottery equilibrium Market games Market uncertainty Mixed strategy equilibrium Monetary search models Monopolistic competition Multiple equilibria Non-convexities Options and derivatives Overlapping generations models Perfect foresight Rational expectations Real business cycles Restricted market participation Self-fulfilling prophecy Sunspot equilibrium Sunspot immunity theorem Symmetry breaking Volatility 

JEL Classifications

D8 
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Authors and Affiliations

  • Karl Shell
    • 1
  1. 1.