In this paper, I show the existence of stationary rational expectations equilibria in a simple two-island, overlapping generations model of the type first considered by Lucas, in which all uncertainty is endogenous. The result is obtained by first constructing "sunspot" equilibria on each island separately and then using the equilibrium pricing equations to eliminate the sunspot variable. In the resulting equilibrium, each island's prices serve as the sunspot for the other island. The constructed equilibrium is nontrivially stochastic.

In this paper, I show the existence of stationary rational expectations equilibria in a simple two-island, overlapping generations model of the type first considered by Lucas, in which all uncertainty is endogenous. The result is obtained by first constructing "sunspot" equilibria on each island separately and then using the equilibrium pricing equations to eliminate the sunspot variable. In the resulting equilibrium, each island's prices serve as the sunspot for the other island. The constructed equilibrium is nontrivially stochastic.