General Equilibrium and The New Neoclassical Synthesis
AbstractWe present a general equilibrium model of the new neoclassical synthesis that has the same levelof generality as the Arrow-Debreu model. This involves a stochastic multi-period economy with amonetary sector and sticky commodity prices. We formulate the notion of a sticky price equilibriumwhere all agents form rational expectations on prices for commodities and assets, interest rates,and rationing. We present a general result showing that monetary policy imposes no restrictionswhatsoever on nominal equilibrium price levels and that the set of sticky price equilibria has adimension equal to the number of terminal date-events. Stickiness of prices implies that thisindeterminacy is real.
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