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Indeterminateness of equilibria and macroeconomics

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  • DRÈZE, Jacques

Abstract

The paper reviews results on indeterminateness of equilibria in two extensions of the standard (Arrow-Debreu) model of general equilibrium. These extensions, motivated by macroeconomic interpretations, concern money and price rigidities. In a natural extension to money (held for transaction purposes), if monetary policy fixes either nominal interest rates or moneysupply (but not both), the variability of inflation rates is unrestricted, at equilibrium. In the absence of initial nominal asset positions, the indeterminateness of inflation rates is harmless, in the complete-markets framework of Arrow-Debreu. When some relative prices are predetermined, there exists generically a continuum of real equilibria, indexed bythe overall degree of rationing. In a model combining money and nominal price rigidities, the fixed nominal prices limit the indeterminateness of inflation rates, but the real indeterminateness subsits. When one introduces in addition a tatonnement process of nominal price formation, incorporatingsome downward nominal rigidities, both the nominal and the real indeterminateness may be eliminated (through the initial conditions), in the complete-markets framework. It is argued that macroeconomic interpretations call for an incomplete-markets framework, hence for expectations, another source of indeterminateness. A concludingsection offers some heuristic remarks on the open problems associated with market incompleteness.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2001058.

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Date of creation: 00 Dec 2001
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Handle: RePEc:cor:louvco:2001058

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Keywords: indeterminateness of equilibria; inflation; price rigidities; incomplete markets;

References

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  1. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
  2. van der Laan, Gerard, 1984. "Supply-constrained fixed price equilibria in monetary economies," Journal of Mathematical Economics, Elsevier, vol. 13(2), pages 171-187, October.
  3. Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, vol. 62(1), pages 1-18, March.
  4. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, vol. 4(3), pages 345-80.
  5. Gaetano Bloise & Jacques Dréze & Herakles Polemarchakis, 2005. "Monetary equilibria over an infinite horizon," Economic Theory, Springer, vol. 25(1), pages 51-74, 01.
  6. Herings, P.J.J. & Dreze, J., 1998. "Continua of Underemployment Equilibria," Discussion Paper 1998-05, Tilburg University, Center for Economic Research.
  7. Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier.
  8. Frank Hahn & Robert Solow, 1997. "A Critical Essay on Modern Macroeconomic Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 026258154x, December.
  9. Citanna, Alessandro & Cres, Herve & Dreze, Jacques & Herings, P. Jean-Jacques & Villanacci, Antonio, 2001. "Continua of underemployment equilibria reflecting coordination failures, also at Walrasian prices," Journal of Mathematical Economics, Elsevier, vol. 36(3), pages 169-200, December.
  10. repec:fth:louvco:9845 is not listed on IDEAS
  11. Dehez, Pierre & Dreze, Jacques H., 1984. "On supply-constrained equilibria," Journal of Economic Theory, Elsevier, vol. 33(1), pages 172-182, June.
  12. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
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