On the Structure of Ramsey Equilibrium: Cycles, Indeterminacy and Sunspots

In this chapter we demonstrate the possibility of periodicity and indeterminacy of perfect foresight equilibrium under borrowing constraints in a dynamic one-sector economy with infinitely-lived heterogeneous households. As a consequence of indeterminacy we can also prove the existence of sunspot equilibria in this economy. The Ramsey model we consider is basically the same as the one used by Becker (1980), Becker and Foias (1987, 1994), and Becker et al. (1991). It differs from standard neoclassical growth models in two aspects, namely, that households are heterogeneous and that markets are incomplete which prevents households from using their discounted future income to finance present consumption.