Indeterminacy of equilibria in a sunspot model and the role of default

Since the 1980\u27s research of the model of incomplete financial markets has been a major issue in theoretical economics. They found that, with the nominal assets, the set of equilibrium allocations is typically indeterminate and most of them are Pareto inefficient. This dissertation is a continuation of this line of research. It studies the structure of sunspot equilibria and presents a model of endogenous determination of asset yields with the help of default. The first chapter (joint with Jean-Marc Tallon and Antonio Villanacci) shows that the equilibrium allocation is typically indeterminate even in a sunspot model. Sunspot model is the one with extrinsic uncertainty, and thus is a natural place for studying market incompleteness. Our result implies that consumers\u27 expectation plays a major role in the determination of equilibrium. In the second chapter, I study the indeterminacy problem of chapter 1 in the utility space rather than in the allocation space. I show that the set of sunspot equilibrium utilities can have a kink at a non-sunspot equilibrium and illustrate this point by several examples. Finally in the third chapter (joint with Jose Marin) we consider the issue of endogenous determination of asset yields. This is done by extending the standard (not necessarily sunspot) model to incorporate the possibility of default. As a result, the equilibrium asset yields can be different from the ex ante one and so does the asset spanning. We show by examples, that the introduction of a redundant asset may improve the welfare of the economy