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Walrasian Indeterminacy and Keynesian Macroeconomics

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    Abstract

    Overlapping generations models with or without production or a portfolio demand for money display a fundamental indeterminacy. Expectations matter; and they are not, in the short run, constrained by the hypotheses of agent optimization, rational expectations, and market clearing. No short run policy analysis is possible without some explicit understanding of how agents expect the economy to respond to the policy. In this framework of perfect foresight and market clearing prices, it is possible to make Keynesian assumptions about the rigidity of money wages and the exogeneity of "animal spirits" of investors, to use the standard IS-LM apparatus, and to derive Keynesian conclusions about the short run effectiveness of policy. Alternatively, starting from difference but no less rational expectations, one can derive the "new classical" neutrality propositions.

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    File URL: http://cowles.econ.yale.edu/P/cd/d07b/d0778.pdf
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    Bibliographic Info

    Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 778.

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    Length: 52 pages
    Date of creation: Oct 1985
    Date of revision:
    Publication status: Published in Review of Economic Studies (1986), 53: 755-779
    Handle: RePEc:cwl:cwldpp:778

    Note: CFP 1120.
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    Keywords: Overlapping generations; perfect foresight; short run policy effectiveness;

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    1. Balasko, Yves & Cass, David & Shell, Karl, 1980. "Existence of competitive equilibrium in a general overlapping-generations model," Journal of Economic Theory, Elsevier, vol. 23(3), pages 307-322, December.
    2. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 66, pages 467.
    3. Dreze, Jacques H, 1975. "Existence of an Exchange Equilibrium under Price Rigidities," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 16(2), pages 301-20, June.
    4. Grandmont Jean-michel, 1983. "On endogenous competitive business cycles," CEPREMAP Working Papers (Couverture Orange) 8316, CEPREMAP.
    5. Wilson, Charles A., 1981. "Equilibrium in dynamic models with an infinity of agents," Journal of Economic Theory, Elsevier, vol. 24(1), pages 95-111, February.
    6. Debreu, Gerard, 1970. "Economies with a Finite Set of Equilibria," Econometrica, Econometric Society, Econometric Society, vol. 38(3), pages 387-92, May.
    7. Hahn, Frank, 1990. "On Inflation," Oxford Review of Economic Policy, Oxford University Press, vol. 6(4), pages 15-25, Winter.
    8. Cass, David, 1972. "On capital overaccumulation in the aggregative, neoclassical model of economic growth: A complete characterization," Journal of Economic Theory, Elsevier, vol. 4(2), pages 200-223, April.
    9. John Geanakoplos & Donald J. Brown, 1985. "Comparative Statics and Local Indeterminacy in OLG Economies: An Application of the Multiplicative Ergodic Theorem," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 773, Cowles Foundation for Research in Economics, Yale University.
    10. Shell, Karl, 1971. "Notes on the Economics of Infinity," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 79(5), pages 1002-11, Sept.-Oct.
    11. Kehoe, Timothy J & Levine, David K, 1985. "Comparative Statics and Perfect Foresight in Infinite Horizon Economies," Econometrica, Econometric Society, Econometric Society, vol. 53(2), pages 433-53, March.
    12. Calvo, Guillermo A., 1978. "On the indeterminacy of interest rates and wages with perfect foresight," Journal of Economic Theory, Elsevier, vol. 19(2), pages 321-337, December.
    13. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
    14. Azariadis, Costas, 1981. "Self-fulfilling prophecies," Journal of Economic Theory, Elsevier, vol. 25(3), pages 380-396, December.
    15. Barro, Robert J & Grossman, Herschel I, 1971. "A General Disequilibrium Model of Income and Employment," American Economic Review, American Economic Association, vol. 61(1), pages 82-93, March.
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    Cited by:
    1. John Geanakoplos, 2008. "Overlapping Generations Models of General Equilibrium," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1663, Cowles Foundation for Research in Economics, Yale University.

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