Stabilizing sunspots

This paper analyzes stabilization of sunspot equilibria in an incomplete financial market framework. Indexation of nominal bonds or introduction of real securities can eliminate the sunspot equilibria. However, we show that the utility of one type of consumer may be minimized at a Walrasian allocation relative to other sunspot equilibrium allocations. Thus, if considering stabilization policies from the status quo of incomplete financial markets, there may be no consensus on implementing them.