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Second-Order, Dissipative T\^atonnement: Economic Interpretation and 2-Point Limit Cycles

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  • Eric Kemp-Benedict

Abstract

This paper proposes an alternative to the classical price-adjustment mechanism (called "t\^{a}tonnement" after Walras) that is second-order in time. The proposed mechanism, an analogue to the damped harmonic oscillator, provides a dynamic equilibration process that depends only on local information. We show how such a process can result from simple behavioural rules. The discrete-time form of the model can result in two-step limit cycles, but as the distance covered by the cycle depends on the size of the damping, the proposed mechanism can lead to both highly unstable and relatively stable behaviour, as observed in real economies.

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File URL: http://arxiv.org/pdf/1108.0188
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Bibliographic Info

Paper provided by arXiv.org in its series Papers with number 1108.0188.

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Date of creation: Jul 2011
Date of revision: Aug 2011
Handle: RePEc:arx:papers:1108.0188

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References

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  1. Saari, Donald G & Simon, Carl P, 1978. "Effective Price Mechanisms," Econometrica, Econometric Society, vol. 46(5), pages 1097-1125, September.
  2. Claus Weddepohl, 1997. "Simulating tatonnement in a production economy," Economic Theory, Springer, vol. 10(3), pages 551-558.
  3. Frank Ackerman, 2001. "Still dead after all these years: interpreting the failure of general equilibrium theory," Journal of Economic Methodology, Taylor & Francis Journals, vol. 9(2), pages 119-139.
  4. Saari, Donald G, 1985. "Iterative Price Mechanisms," Econometrica, Econometric Society, vol. 53(5), pages 1117-31, September.
  5. Kirman, A P & Koch, K J, 1986. "Market Excess Demand in Exchange Economies with Identical Preferences and Collinear Endowments," Review of Economic Studies, Wiley Blackwell, vol. 53(3), pages 457-63, July.
  6. Bala, Venkatesh & Majumdar, Mukul & Mitra, Tapan, 1998. "A note on controlling a chaotic tatonnement," Journal of Economic Behavior & Organization, Elsevier, vol. 33(3-4), pages 411-420, January.
  7. Victor Ginsburgh & Michiel Keyzer, 2002. "The structure of applied general equilibrium models," ULB Institutional Repository 2013/3313, ULB -- Universite Libre de Bruxelles.
  8. Herbert E. Scarf, 1959. "Some Examples of Global Instability of the Competitive Equilibrium," Cowles Foundation Discussion Papers 79, Cowles Foundation for Research in Economics, Yale University.
  9. Tuinstra, Jan, 1997. "A price adjustment process with symmetry," Economics Letters, Elsevier, vol. 57(3), pages 297-303, December.
  10. Debreu, Gerard, 1974. "Excess demand functions," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 15-21, March.
  11. Sonnenschein, Hugo, 1972. "Market Excess Demand Functions," Econometrica, Econometric Society, vol. 40(3), pages 549-63, May.
  12. Goeree, Jacob K. & Hommes, Cars & Weddepohl, Claus, 1998. "Stability and complex dynamics in a discrete tatonnement model," Journal of Economic Behavior & Organization, Elsevier, vol. 33(3-4), pages 395-410, January.
  13. Mantel, Rolf R., 1974. "On the characterization of aggregate excess demand," Journal of Economic Theory, Elsevier, vol. 7(3), pages 348-353, March.
  14. Bala, Venkatesh & Majumdar, Mukul, 1992. "Chaotic Tatonnement," Economic Theory, Springer, vol. 2(4), pages 437-45, October.
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Cited by:
  1. Eric Kemp-Benedict, 2012. "Second-order Price Dynamics: Approach to Equilibrium with Perpetual Arbitrage," Papers 1202.5926, arXiv.org.
  2. Eric Kemp-Benedict, 2012. "Price and Quantity Trajectories: Second-order Dynamics," Papers 1204.3156, arXiv.org.

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