''Quasifundamental'' variation in the price level and the inflation rate''

This paper describes a class of overlapging-generations economies that have ''quasifundamental'' (QF) equilibria-equilibria in which the price level and inflation rate are positively correlated with a ''fundamental'' random variable, despite the existence of an alternative, Pareto-dominant equilibrium in which the price level and/or inflation rate are constant. In QF equilibria the inflation rate is ''excessively variable'' using either quantitative or welfare-based variability measures. These equilibria also provide rational-expectations adjustment processes under which the low-inflation monetary steady state is dynamically stable. Journal of Economic Literature Classification Numbers: E31, E32, E41. (C) 1997 Academic Press.