Eliminating sunspot effects in overlapping generations models

We reappraise the robustness of sunspot effects in overlapping-generations models. Azariadis’s well-known example economies have stationary, deterministic fundamentals (preferences, technologies, and endowments), yet sunspots affect multiple equilibria. And those equilibria are robust to common perturbations of underlying fundamentals. However, we find that judiciously splitting each of Azariadis’s goods into close substitutes eliminates sunspot effects, and the remaining equilibrium is unique and deterministic. Forecasting thus becomes conclusive, and there is no longer a role for government policy to stabilize excess volatility.