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Price expectations in neo-Walrasian equilibrium models: an overview

Saverio Fratini (), Enrico Levrero () and Fabio Ravagnani ()

MPRA Paper from University Library of Munich, Germany

Abstract: Since the late 1960s, the efforts of general equilibrium theorists have been directed towards overcoming the evident limitation of the Arrow-Debreu model, i.e. the assumption that the transactions associated with the future activities of agents are all regulated at the initial date on a complete system of forward markets. Research has thus focused on ‘sequential economies’, in which spot markets are active in each period, and has developed along two paths, both inspired by Hicks’s Value and Capital and stressing the dependence of agents’ choices on their expectations of future prices. The first is temporary equilibrium theory, in which expectations are assumed to be subjective. The second postulates that all agents exactly predict the future prices (sequential economies with perfect foresight). This paper examines the analytical problems that the inclusion of expectations among the determinants of equilibrium originates within each approach. In the light of the studies of the 1970s and 1980s, it first illustrates the difficulties that arise in temporary equilibrium theory due to the subjective nature of individual forecasts. Then it moves on to examine sequential economies with perfect foresight. After illustrating the equilibrium notion on which the analysis of those economies relies, i.e. the ‘equilibrium of plans, prices and price expectations’ introduced by Radner (1972), it indicates, on the basis of recent contributions, that for plausible configurations of the economy the perfect foresight associated with Radner equilibria proves not only unrealistic but also theoretically dubious.

Keywords: expectations; temporary equilibrium; Radner equilibrium (search for similar items in EconPapers)
JEL-codes: B21 D46 D51 D84 (search for similar items in EconPapers)
Date: 2016-02
New Economics Papers: this item is included in nep-hpe
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