Models of sunspots and multiple equilibria were developed in the 1980s as an alternative to the dominant Real Business Cycle agenda. For the last couple of decades, these models have taken a backstage role as explanations of the macroeconomy. Now they are back with a vengeance.
On Thursday and Friday of this week, Jess Benhabib and I are running a conference at the San Francisco Fed that showcases new research on multiple equilibria and financial crises. The papers at this conference trace their roots to an agenda on sunspots, developed at the University of Pennsylvania in the 1980s.
The sunspot agenda began with the seminal paper by David Cass and Karl Shell, Do Sunspots Matter?, the pathbreaking paper on Self-Fulfilling Prophecies by Costas Azariadis and a paper by myself and Michael Woodford in which we developed techniques that form the basis for dynamic models of indeterminacy that are now widely used to understand monetary policy regimes.
Another important landmark was the 1994 conference at NYU, published in the Journal of Economic Theory as a symposium on Growth Fluctuations and Sunspots. Here is a link to a survey paper that explains the history of the sunspot agenda and its connection to endogenous business cycles.
I'm looking forward to the dinner talk on Thursday night by Karl Shell and I'm also looking forward to seeing the tremendous range of papers that are moving this agenda forwards in new and exciting directions. Here is a link to the conference papers.