STATIONARY MARKOV EQUILIBRIA IN AN OLG MODEL WITH CORRELATED PRODUCTION SHOCKS

In this paper, we examine the existence of stationary equilibria in an overlapping generations model where production shocks are correlated over time. In general, the system is complicated by dynamic indetermin acy and possibility of sunspot equilibria. However, there exists a tim e-homogeneous Markov process of the state variable which represents a nonsunspot dynamic equilibrium. The long-run analysis establishes a su fficient condition for the existence of a nontrivial stationary equili brium. Moreover, it is shown that the conventional restrictions on the production function are not sufficient to prevent the economy from co nverging to zero production and consumption.