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Pareto Optimal Improvements for Sunspots: The Golden Rule as a Target for Stabilization

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  • Chattopadhyay, Subir K

Abstract

The stationary sunspot equilibria of a simple one good OLG economy are considered. These equilibria are known to be suboptimal. We show that, for any such equilibrium allocation, there always exists a Pareto optimal improvement which has the additional property of reaching the Golden Rule in finite time, i.e., the monetary steady state acts as a target. We also show that, in general, periodic allocations cannot be used as targets. The result is interpreted as a welfare theoretical justification for stabilization policy.

Suggested Citation

  • Chattopadhyay, Subir K, 1996. "Pareto Optimal Improvements for Sunspots: The Golden Rule as a Target for Stabilization," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 8(1), pages 123-135, June.
    • Handle: RePEc:spr:joecth:v:8:y:1996:i:1:p:123-35
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    Cited by:

    1. Jean-François Mertens & Anna Rubinchik, 2013. "Equilibria in an overlapping generations model with transfer policies and exogenous growth," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 54(3), pages 537-595, November.
    2. Guo, Jang-Ting & Lansing, Kevin J., 2002. "Fiscal Policy, Increasing Returns, And Endogenous Fluctuations," Macroeconomic Dynamics, Cambridge University Press, vol. 6(5), pages 633-664, November.

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