Regime-Switching Sunspot Equilibria in a One-Sector Growth Model with Aggregate Decreasing Returns and Small Externalities
This paper shows that regime-switching sunspot equilibria easily arise in a one-sector growth model with aggregate decreasing returns and arbitrarily small externalities. We construct a regime-switching sunspot equilibrium under the assumption that the utility function of consumption is linear. We also construct a stochastic optimal growth model whose optimal process turns out to be a regime-switching sunspot equilibrium of the original economy under the assumption that there is no capital externality. We illustrate our results with numerical examples.
Research Institute for Economics and Business Administration,
Rokkodai-cho, Nada-ku, Kobe