A Stochastic Approach to Disequilibrium Macroeconomics

Seppo Honkapohja and Takatoshi Ito ()

No 1, NBER Technical Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper, our aim is to develop an alternative approach to analyzing a macroeconomic model where markets do not clear. Earlier approaches have had difficulties in interpreting effective demand, a key concept in disequilibrium macroeconomics. We propose a new definition of effective demand similar to that of Svensson, Gale, and Green. Given the states of the markets, there is in general uncertainty about the amount of trades individuals can complete. Considering this uncertainty, each individual has to make binding trade offers, i.e., effective demands, a fraction of which will be actually transacted. Using the newly-defined effective demand, we define the rationing equilibrium as a fixed point of disequilibrium signals. We analyze various regimes of rationing equilibria. The most startling conclusion is the multiplicity of equilibria: (1) given wages and prices, there may exist more than one type of equilibrium and (ii) even at Wairasian prices there may exist non-Walrasian equilibria, and these are usually stable with respect to a quantity-adjustment mechanism while the Wairasian equilibrium is unstable, The comparative-static properties of policy we also considered, and they are comparable to those of the earlier approach.

Date: 1979-09
Note: EFG
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Published as Honkapohja, Seppo and Takatoshi Ito. "On Macroeconomic Equilibrium with Stochastic Rationing." Scandinavian Journal of Economics, Vol. 87, No. 1, 1985, pp. 66-88.

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