On the stability of nonsunspot equilibria

This paper analyzes the stability of the (Pareto efficient) nonsunspot equilibria as a function of the constraints faced by consumers in their ability to transfer wealth between states of nature. The nonsunspot equilibria are independent of the constraints since they can be identified to the equilibria of the associated certainty economy. It is shown that the equilibria that are stable for the certainty economy define nonsunspot equilibria that are stable in the following two polar cases: 1) All consumers are unconstrained; 2) All consumers are fully constrained. Furthermore, the stable certainty equilibria with small trade vectors define nonsunspot equilibria that are stable independently of the constraint levels. Instability can develop for intermediate constraint levels only at nonsunspot equilibria that feature sufficiently large trade vectors. A small change in the constraint levels may then trigger a jump from a Pareto efficient nonsunspot equilibrium to a Pareto inefficient sunspot equilibrium.