Short-memory equilibrium in stochastic overlapping generations economies

A. CITANNA, P. Siconolfi

Journal of Economic Theory

May 2007, vol. 134, n°1, pp.448-469

Departments: Economics & Decision Sciences

Keywords: Overlapping generations, Real business cycle, Equilibrium

In stochastic OLG exchange economies, we show that short-memory equilibria'the natural extension from deterministic economies of steady states, low-order cycles, or finite state-space stationary sunspots equilibria'fail to exist generically in utilities. As a result, even with independent and identically distributed exogenous shocks there is serial correlation in endogenous economic variables in equilibrium. This arises even if utilities are time-separable, some goods inferior, and there are no technological lags. Hence, the origins of economic fluctuations can be traced only to the demographic structure of a heterogeneous agent, multiple-good economy