Existence and stability of rational expectation-equilibria in a simple overlapping generation model (Q1064954)

The microeconomic paper considers an overlapping generations model with outside money and one consumption good. Economic agents form their expectations rationally. Attention is focussed on the question whether the sequence of temporary equilibria converges at least asymptotically to a stationary state. Prior to this question the author analyzes whether in the limit an expectation function exists which is self-fulfilling and stable. Within the context of the author's model it is shown that globally no self-fulfilling expectation exists; even locally, existence and stability can only be guaranteed for homothetic preferences, and to obtain asymptotic stability, the elasticity of substitution must be very small. From these results the author conducts that a learning process can never reach rationality and therefore, exogenous expectations should always be chosen. The paper is divided into three parts; section one presents the model and the results; section two relates this model to comparable models in the literature; the final part contains all proofs.