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Sunspot Equilibrium

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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.

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    Karl Shell

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Shell, K. (2018). Sunspot Equilibrium. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_1362

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