Uncertainty, Adjustment Costs and Expected keynesian Unemployment

Christopher J Ellis

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: In most macroeconomic models with quantity rationing regard agents as very naive, for despite sucessive periods of rationiong they continue to behave as if they have had no such experience. This behaviour is logical since quantity adjustment is assumed costless and frictionless. However if we are to challenge the validity of the price tatonnement it is perhaps strange to allow free frictionless quantity adjustment. In this model quantity adjustment costs are introduced in the form of resources consumed in the adjustment process. Agents are aware of adjustment costs, but have to state initial transaction demands before the state of the world is known, consequently they base initial trades upon the maximisation of Von Neumann-Morgenstern objective functions. On learning the true state of the world agents then adjust optimally away from their initial vector.

Pages: 29 pages
Date: 1981
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:189

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