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A General Equilibrium Expression of the Paradox of Thrift

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Author Info
Christophe Chamley (Cowles Foundation, Yale University)

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Abstract

A model is presented which is derived from some observations of Keynes on the nature of capital. The allocation of investment is analyzed in two economies with random demand shocks which are identical except for the types of markets. In the first, the combination of an asset and forward markets realizes the complete set of markets. In the second, the forward markets are replaced by spot markets. Consumers and entrepreneurs are rational and markets clear. A clear definition of the paradox of thrift is proposed and its existence is proven. The substitution of spot markets for forward markets generates fluctuations of the aggregate variables. The equilibrium with fluctuations is not always a constrained Pareto optimum.

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File URL: http://cowles.econ.yale.edu/P/cd/d07a/d0700.pdf
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Paper provided by Cowles Foundation, Yale University in its series Cowles Foundation Discussion Papers with number 700.

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Length: 43 pages
Date of creation: May 1984
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Handle: RePEc:cwl:cwldpp:700

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  1. Radner, Roy, 1979. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Econometrica, Econometric Society, vol. 47(3), pages 655-78, May. [Downloadable!] (restricted)
  2. Jones, Robert A & Ostroy, Joseph M, 1984. "Flexibility and Uncertainty," Review of Economic Studies, Blackwell Publishing, vol. 51(1), pages 13-32, January. [Downloadable!] (restricted)
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  3. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October. [Downloadable!] (restricted)
  4. Kreps, David M., 1977. "A note on "fulfilled expectations" equilibria," Journal of Economic Theory, Elsevier, vol. 14(1), pages 32-43, February. [Downloadable!] (restricted)
  5. Hart, Oliver D., 1975. "On the optimality of equilibrium when the market structure is incomplete," Journal of Economic Theory, Elsevier, vol. 11(3), pages 418-443, December. [Downloadable!] (restricted)
  6. Green, Jerry R, 1973. "Temporary General Equilibrium in a Sequential Trading Model with Spot and Futures Transactions," Econometrica, Econometric Society, vol. 41(6), pages 1103-23, November. [Downloadable!] (restricted)
  7. Grossman, Sanford J, 1981. "An Introduction to the Theory of Rational Expectations under Asymmetric Information," Review of Economic Studies, Blackwell Publishing, vol. 48(4), pages 541-59, October. [Downloadable!] (restricted)
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