IDEAS home Printed from https://ideas.repec.org/a/spr/jecfin/v45y2021i1d10.1007_s12197-020-09523-7.html
   My bibliography  Save this article

Efficiency on the dynamic adjustment path in a financial market

Author

Listed:
  • Nasreen Nawaz

    (Federal Board of Revenue)

Abstract

The invisible hand of a perfectly competitive financial market refers to the self-regulating behavior of the market where if each consumer and producer of funds is allowed to freely make their own choices, the market settles at an efficient outcome which is beneficial to all the individual members of the society and hence to the society as a whole. Two well-known facets of the invisible hand are generally mentioned in the economics and finance literature - the first one is a static picture of a perfectly competitive market, i.e., a competitive market is efficient in an equilibrium; and the second one is that if the competitive market is disturbed from its equilibrium position, in the absence of a market failure and frictions, the market automatically settles at a new efficient equilibrium. This paper takes into account a third facet, i.e., how efficient is a perfectly competitive financial market on the dynamic adjustment path after an economic shock in the absence of all kinds of frictions and interest rate rigidities. We conclude that coordinated actions of economic agents can result in a level of economic efficiency on the dynamic adjustment path which is not achievable by a free market mechanism.

Suggested Citation

  • Nasreen Nawaz, 2021. "Efficiency on the dynamic adjustment path in a financial market," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 45(1), pages 49-74, January.
    • Handle: RePEc:spr:jecfin:v:45:y:2021:i:1:d:10.1007_s12197-020-09523-7
    DOI: 10.1007/s12197-020-09523-7
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s12197-020-09523-7
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s12197-020-09523-7?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Chen, Haipeng (Allan) & Levy, Daniel & Ray, Sourav & Bergen, Mark, 2008. "Asymmetric Price Adjustment in the Small," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 55(4), pages 728-737.
    2. Bartosz Maćkowiak & Mirko Wiederholt, 2015. "Business Cycle Dynamics under Rational Inattention," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 82(4), pages 1502-1532.
    3. Frey, Bruno S & Oberholzer-Gee, Felix, 1997. "The Cost of Price Incentives: An Empirical Analysis of Motivation Crowding-Out," American Economic Review, American Economic Association, vol. 87(4), pages 746-755, September.
    4. Bartosz Mackowiak & Mirko Wiederholt, 2009. "Optimal Sticky Prices under Rational Inattention," American Economic Review, American Economic Association, vol. 99(3), pages 769-803, June.
    5. Leif Danziger, 1999. "A Dynamic Economy with Costly Price Adjustments," American Economic Review, American Economic Association, vol. 89(4), pages 878-901, September.
    6. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    7. Jane Hemsley-Brown, 2011. "Market heal thyself: the challenges of a free market in higher education," Journal of Marketing for Higher Education, Taylor & Francis Journals, vol. 21(2), pages 115-132, September.
    8. Wright, Randall, 1986. "Job Search and Cyclical Unemployment," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 38-55, February.
    9. Kaldor, Nicholas, 1972. "The Irrelevance of Equilibrium Economics," Economic Journal, Royal Economic Society, vol. 82(328), pages 1237-1255, December.
    10. Nancy Folbre & Julie A. Nelson, 2000. "For Love or Money--Or Both?," Journal of Economic Perspectives, American Economic Association, vol. 14(4), pages 123-140, Fall.
    11. Jerry Green, 1977. "The Non-existence of Informational Equilibria," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(3), pages 451-463.
    12. Howell, David (ed.), 2004. "Fighting Unemployment: The Limits of Free Market Orthodoxy," OUP Catalogue, Oxford University Press, number 9780195165852, Decembrie.
    13. Sunstein, Cass R., 1999. "Free Markets and Social Justice," OUP Catalogue, Oxford University Press, number 9780195102734, Decembrie.
    14. Francis M. Bator, 1958. "The Anatomy of Market Failure," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 72(3), pages 351-379.
    15. Angeletos, George-Marios & Calvet, Laurent-Emmanuel, 2005. "Incomplete-market dynamics in a neoclassical production economy," Journal of Mathematical Economics, Elsevier, vol. 41(4-5), pages 407-438, August.
    16. Marc Nerlove, 1958. "Adaptive Expectations and Cobweb Phenomena," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 72(2), pages 227-240.
    17. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
    18. Giuseppe Bertola & Ricardo J. Caballero, 1990. "Kinked Adjustment Costs and Aggregate Dynamics," NBER Chapters, in: NBER Macroeconomics Annual 1990, Volume 5, pages 237-296, National Bureau of Economic Research, Inc.
    19. Sen, Amartya, 1993. "Markets and Freedoms: Achievements and Limitations of the Market Mechanism in Promoting Individual Freedoms," Oxford Economic Papers, Oxford University Press, vol. 45(4), pages 519-541, October.
    20. Cajueiro, Daniel O. & Gogas, Periklis & Tabak, Benjamin M., 2009. "Does financial market liberalization increase the degree of market efficiency? The case of the Athens stock exchange," International Review of Financial Analysis, Elsevier, vol. 18(1-2), pages 50-57, March.
    21. Joseph E. Stiglitz, 1991. "The Invisible Hand and Modern Welfare Economics," NBER Working Papers 3641, National Bureau of Economic Research, Inc.
    22. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    23. Wilfred Dolfsma, 2009. "Market and Society: How Do They Relate, and How Do They Contribute to Welfare?," Palgrave Macmillan Books, in: Institutions, Communication and Values, chapter 2, pages 6-13, Palgrave Macmillan.
    24. Talman, A.J.J. & Thijssen, J.J.J., 2006. "Existence of equilibrium and price adjustments in a finance economy with incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 42(3), pages 255-268, June.
    25. Michael Woodford, 2002. "Financial market efficiency and the effectiveness of monetary policy," Economic Policy Review, Federal Reserve Bank of New York, vol. 8(May), pages 85-94.
    26. Bruce C. Greenwald & Joseph E. Stiglitz, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(2), pages 229-264.
    27. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    28. Jan Tuinstra, 2004. "A Price Adjustment Process In A Model Of Monopolistic Competition," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 6(03), pages 417-442.
    29. Satz, Debra, 2010. "Why Some Things Should Not Be for Sale: The Moral Limits of Markets," OUP Catalogue, Oxford University Press, number 9780195311594, Decembrie.
    30. Robert E. Lucas & Jr., 1967. "Adjustment Costs and the Theory of Supply," Journal of Political Economy, University of Chicago Press, vol. 75, pages 321-321.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ahmed, Muhammad Ashfaq & Nawaz, Nasreen, 2023. "Adam Smith's Perfectly Competitive Market is Not Pareto Efficient: A Dynamic Perspective," MPRA Paper 118362, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ahmed, Muhammad Ashfaq & Nawaz, Nasreen, 2023. "Adam Smith's Perfectly Competitive Market is Not Pareto Efficient: A Dynamic Perspective," MPRA Paper 118362, University Library of Munich, Germany.
    2. Garcia, René, 1986. "La théorie économique de l’information : exposé synthétique de la littérature," L'Actualité Economique, Société Canadienne de Science Economique, vol. 62(1), pages 88-109, mars.
    3. Bartosz Maćkowiak & Filip Matějka & Mirko Wiederholt, 2023. "Rational Inattention: A Review," Journal of Economic Literature, American Economic Association, vol. 61(1), pages 226-273, March.
    4. Joseph E. Stiglitz, 2004. "Information and the Change in the Paradigm in Economics, Part 2," The American Economist, Sage Publications, vol. 48(1), pages 17-49, March.
    5. Malina, Christiane, 2019. "A normative analysis of subsidization of all-electric vehicles in Germany," CAWM Discussion Papers 109, University of Münster, Münster Center for Economic Policy (MEP).
    6. Marco FRIGERIO & Daniela VANDONE, 2018. "Virtuous or Vicious? Development Banks in Europe," Departmental Working Papers 2018-07, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    7. Alexander S. Sangare, 2005. "Efficience des marchés : un siècle après Bachelier," Revue d'Économie Financière, Programme National Persée, vol. 81(4), pages 107-132.
    8. Giuseppe Pernagallo & Benedetto Torrisi, 2020. "A theory of information overload applied to perfectly efficient financial markets," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 14(2), pages 223-236, October.
    9. Diniz-Maganini, Natalia & Diniz, Eduardo H. & Rasheed, Abdul A., 2021. "Bitcoin’s price efficiency and safe haven properties during the COVID-19 pandemic: A comparison," Research in International Business and Finance, Elsevier, vol. 58(C).
    10. Nimark, Kristoffer P. & Pitschner, Stefan, 2019. "News media and delegated information choice," Journal of Economic Theory, Elsevier, vol. 181(C), pages 160-196.
    11. Ashok Chakravarti, 2012. "Institutions, Economic Performance and the Visible Hand," Books, Edward Elgar Publishing, number 14751.
    12. Joseph E. Stiglitz, 2017. "The Revolution of Information Economics: The Past and the Future," NBER Working Papers 23780, National Bureau of Economic Research, Inc.
    13. Kacperczyk, Marcin & Nosal, Jaromir & Stevens, Luminita, 2019. "Investor sophistication and capital income inequality," Journal of Monetary Economics, Elsevier, vol. 107(C), pages 18-31.
    14. Frieden, B. Roy & Hawkins, Raymond J., 2010. "Asymmetric information and economics," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(2), pages 287-295.
    15. Mäkinen, Taneli & Ohl, Björn, 2015. "Information acquisition and learning from prices over the business cycle," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 585-633.
    16. Teisl, Mario F. & Roe, Brian, 1998. "The Economics of Labeling: An Overview of Issues for Health and Environmental Disclosure," Agricultural and Resource Economics Review, Cambridge University Press, vol. 27(2), pages 140-150, October.
    17. Douglas J. Elliott & Greg Feldberg & Andreas Lehnert, 2013. "The History of Cyclical Macroprudential Policy in the United States," Working Papers 13-08, Office of Financial Research, US Department of the Treasury.
    18. Blankespoor, Elizabeth & deHaan, Ed & Marinovic, Iván, 2020. "Disclosure processing costs, investors’ information choice, and equity market outcomes: A review," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    19. Michał Gradzewicz & Krzysztof Makarski & Joanna Tyrowicz, 2013. "Do We Really Need to Start From Scratch? Economic Theory on Economic Crises," Working Papers 2013-17, Faculty of Economic Sciences, University of Warsaw.
    20. Kurlat, Pablo, 2021. "Investment externalities in models of fire sales," Journal of Monetary Economics, Elsevier, vol. 122(C), pages 102-118.

    More about this item

    Keywords

    Dynamic efficiency; Adjustment path; Equilibrium; Coordination;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:jecfin:v:45:y:2021:i:1:d:10.1007_s12197-020-09523-7. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.