This paper provides a theoretical approach to investigate the real effects of inflation volatility driven by a self-fulfilling prophecy (i.e., sunspot equilibrium) on investment, capital accumulation, and welfare in a representative-agent macroeconomics model. The model is constructed based on...

This paper demonstrates that in macroeconomic models with nominal rigidities, a global solution exists that supports an alternate equilibrium where traditional Taylor rules give rise to self-fulfilling aggregate volatility and excess risk-premium. Within the rational expectations framework, we...