Previously circulated as a working paper titled "Sunspots and Multiplicity."
Please cite as: Hoelle, M. (2011): Sunspots and multiplicity, EUI Working Paper Series, Report no. MWP 2011/09.
This paper considers the conditions necessary for sunspot effects and verifies that these conditions are independent of the number of underlying certainty equilibria. This claim is made within the class of two-period general equilibrium models with incomplete markets and numeraire assets whose payouts are identical across realizations of extrinsic uncertainty. First, I prove that such a multiplicity is not necessary for sunspot effects. Second, I prove that, for a set of economies commonly considered in sunspot examples, an equilibrium with sunspot effects can never be characterized as a randomization over multiple certainty equilibria.