Expected Equilibrium and Fix-Price Equilibrium in a Simple Macroeconomic Model: Equivalence Theorems and Stability

Philippe Michel

No 1982013, Discussion Papers (REL - Recherches Economiques de Louvain) from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: The recent development of macroeconomic models with fixed prices and adjustment of quantities has shown the importance of considering the type of unemployment in the economy, since this determines the effects of economic policy decisions. The fundamental concept of this theory, namely fix-price equilibrium with quantity rationing, presents similarities with Walrasian equilibrium. Its interpretation is based on tatonnements on quantities instead of tatonnements on prices. Another approach based on firms’ expectations is studied here in a simple macroeconomic model. This approach considers “monopolistic behavior on quantities” by firms; surprisingly, this asymmetrical treatment of firms and households is very close to fix-price equilibrium where agents are treated symmetrically. Equivalence theorems allow replacing the tatonnement assumption with the one of locally perfect foresight by firms. Moreover, there is an equivalence between the optimization behavior of firms and the stability of fix-price equilibrium with respect to adjustment of quantities.

Pages: 20
Date: 1982-03-01
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