Extrapolative Expectations and Market Stability

Fernando Vega-Redondo

International Economic Review, 1989, vol. 30, issue 3, 513-17

Abstract: An auctioneer model of market adjustment is proposed which, unlike the standard formulation, has prices react to extrapolated (rather than prevailing) excess demands. If expectations are sufficiently sensitive to current rates of change, every regular market equilibrium is shown to be locally stable. The model can be regarded as providing an institutional interpretation to Newton-like methods of market adjustment that, as the Newton process itself, ensure stability of every regular zero of a vector field. Copyright 1989 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1989
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