Aurélien Saïdi

The Indeterminate Fate of Sunspots in Economics

In this paper, we use archival sources, interviews and bibliometrics to trace the development of a loose community interested in indeterminacy and sunspots, and we propose several explanations for this indeterminate fate of their models. Sunspots were initially developed by Cass and Shell in reaction to some perceived inconsistencies they found in Lucas’s 1972 model. The idea that extrinsic beliefs matter in the context of indeterminacy was then spread by a set of researchers associated with the Center for Analytical Research in Economics and the Social Sciences (CARESS), at the University of Pennsylvania, and the Centre pour la Recherche Economique et ses Applications (CEPREMAP) in France, though by adopting distinct modeling strategies and vocabulary. By the mid-1980s, several theorists understood that they were interested in common topics – fluctuations, indeterminacy and coordination failures and attempted to draw connections between OLGs, general equilibrium, non-linear dynamics and game theory models. We explain how this convergence was counterbalanced by several fragmenting forces, and we outline several explanations for the marginalization of these models within economics: they were perceived by macroeconomists to be ultra-sophisticated limit cases devoid of practical relevance, they had no empirical dimension, and they were neglected by policy-makers, in particular central bankers. Finally, we quickly describe efforts by the second generation of sunspot theorists to correct these flaws by switching to RBC modeling and calibration, and provide a few hints on the current state of sunspot models.

Exploring Duopoly Markets with Conjectural Variations

In this article, the authors investigate competitive firm behaviors in a two-firm environment assuming linear cost and demand functions. By introducing conjectural variations, they capture the different market structures as specific configurations of a more general model. Conjectural variations are based on the assumption that each firm believes its own strategy influences its rivals strategy. Firms derive their optimal choice from these exogenous conjectures, under the form of a conjectural best-response function. The authors’ approach fully encompasses the standard measures of market power (the Lerner Index) and concentration (the Herfindahl Index), both depending on the conjectural variations. They finally represent, analytically and graphically, the equilibrium strategies and the associated indexes in a unified framework for any level of competition, ranging from perfect competition to collusion.

Increasing Returns to Scale and Welfare: Ranking the Multiple Deterministic Equilibria

We consider a real business cycle model with a productive externality and an aggregate non- convex technology set µa la Benhabib and Farmer embodying capacity utilization, which exhibits indeterminacy of the steady state and multiplicity of deterministic equilibria under plausible values of the increasing returns to scale. The aim of the paper is to rank these different equilibria according to the initial value of consumption using both a linear-quadratic approximation, extensively explained by Benigno and Woodford [2006a, 2006b], and simulation methods. We study the implications of such a ranking in terms of smoothness of the welfare-maximizing trajectory and show that the welfare- maximizing consumption and labor paths are all the smoother since the level of increasing returns is low. At last, we show that this solution provides a good benchmark for judging the desirability of the stabilization policy proposed by Guo and Lansing [1997].