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Equilibrium adjustment of disequilibrium prices

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Author Info

  • Herings, P.J.J.

    (Tilburg University)

  • Laan, G. van der
  • Talman, A.J.J.

    (Tilburg University)

  • Venniker, R.

Abstract

We consider an exchange economy in which price rigidities are present. In the short run the non-numeraire commodities have a exible price level with respect to the numeraire commodity but their relative prices are mutually fixed. In the long run prices are assumed to be completely exible. For a given price level and fixed relative prices, markets can be equilibrated by means of quantity rationing on demand and supply. Keeping markets in equilibrium through rationing, we provide an adjustment process in prices and quantities converging from a trivial equilibrium with complete demand rationing on all non-numeraire markets to a Walrasian equilibrium. Along the path initially all relative prices are kept fixed and the price level is increased. Rationing schemes are adjusted to keep markets in equilibrium. Doing so the process reaches a short run equilibrium with only demand rationing and no rationing on the numeraire and at least one of the other commodities. The process allows for a downward price adjustment of non-rationed non-numeraire commodities and reaches a Walrasian equilibrium in the long run.

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Bibliographic Info

Paper provided by Tilburg University in its series Open Access publications from Tilburg University with number urn:nbn:nl:ui:12-73866.

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Date of creation: 1997
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Publication status: Published in Journal of Mathematical Economics (1997) v.27, p.53-77
Handle: RePEc:ner:tilbur:urn:nbn:nl:ui:12-73866

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Web page: http://www.tilburguniversity.edu/

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  1. Herings, P.J.J., 1992. "On the structure of constrained equilibria," Research Memorandum 587, Tilburg University, Faculty of Economics and Business Administration.
  2. Weddepohl, Claus, 1987. "Supply-constrained equilibria in economies with indexed prices," Journal of Economic Theory, Elsevier, vol. 43(2), pages 203-222, December.
  3. Laroque, G, 1981. "A Comment on "Stable Spillovers among Substitutes."," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 355-61, April.
  4. Laan, G. van der & Talman, A.J.J., 1987. "A convergent price adjustment process," Open Access publications from Tilburg University urn:nbn:nl:ui:12-154936, Tilburg University.
  5. Veendorp, E C H, 1975. "Stable Spillovers among Substitutes," Review of Economic Studies, Wiley Blackwell, vol. 42(3), pages 445-56, July.
  6. Blad, Michael C., 1978. "On the speed of adjustment in the classical tatonnement process: A limit result," Journal of Economic Theory, Elsevier, vol. 19(1), pages 186-191, October.
  7. 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.
  8. Polterovich, Victor, 1993. "Rationing, Queues, and Black Markets," Econometrica, Econometric Society, vol. 61(1), pages 1-28, January.
  9. Herings, P.J.J., 1993. "On the connectedness of the set of constrained equilibria," Discussion Paper 1993-63, Tilburg University, Center for Economic Research.
  10. van der LAAN, Gerard, . "Simplicial approximation of unemployment equilibria," CORE Discussion Papers RP -467, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  11. Kamiya, Kazuya, 1990. "A Globally Stable Price Adjustment Process," Econometrica, Econometric Society, vol. 58(6), pages 1481-85, November.
  12. Day, Richard H. & Pianigiani, Giulio, 1991. "Statistical dynamics and economics," Journal of Economic Behavior & Organization, Elsevier, vol. 16(1-2), pages 37-83, July.
  13. Day, Richard H. & Pianigiani, Giulio, 1991. "Statistical Dynamics and Economics," Working Paper Series 293, Research Institute of Industrial Economics.
  14. 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.
  15. Smale, Steve, 1976. "A convergent process of price adjustment and global newton methods," Journal of Mathematical Economics, Elsevier, vol. 3(2), pages 107-120, July.
  16. Saari, Donald G, 1985. "Iterative Price Mechanisms," Econometrica, Econometric Society, vol. 53(5), pages 1117-31, September.
  17. Laan, G. van der & Talman, A.J.J., 1985. "Adjustment processes for finding economic equilibria," Research Memorandum 174, Tilburg University, Faculty of Economics and Business Administration.
  18. Dehez, Pierre & Dreze, Jacques H., 1984. "On supply-constrained equilibria," Journal of Economic Theory, Elsevier, vol. 33(1), pages 172-182, June.
  19. Wu, Ho-Mou, 1988. "Unemployment equilibrium in a random economy," Journal of Mathematical Economics, Elsevier, vol. 17(4), pages 385-400, September.
  20. van der Laan, Gerard, 1980. "Equilibrium under Rigid Prices with Compensation for the consumers," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(1), pages 63-73, February.
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Cited by:
  1. Laan, G. van der & Talman, A.J.J., 2002. "Dynamic Adjustment of Supply Constrained Disequilibria to Walrasian Equilibrium," Discussion Paper 2002-61, Tilburg University, Center for Economic Research.
  2. P.J.J. Herings, 2001. "Universally Stable Adjustment Processes - A Unifying Approach," GE, Growth, Math methods 0205002, EconWPA.
  3. Herings, P.J.J. & Laan, G. van der & Talman, A.J.J., 1998. "Price-Quantity Adjustment in a Keynesian Economy," Discussion Paper 1998-118, Tilburg University, Center for Economic Research.
  4. Sander van der Hoog, 2004. "Credit and Cash-in-Advance in Disequilibrium Models," Computing in Economics and Finance 2004 294, Society for Computational Economics.
  5. Eric Kemp-Benedict, 2012. "Price and Quantity Trajectories: Second-order Dynamics," Papers 1204.3156, arXiv.org.
  6. van den Elzen, Antoon & Kremers, Hans, 2006. "An adjustment process for nonconvex production economies," Journal of Mathematical Economics, Elsevier, vol. 42(1), pages 1-13, February.
  7. Herings, P. Jean-Jacques & van der Laan, Gerard & Venniker, Richard, 1996. "The Transition from a Drèze Equilibrium to a Walrasian Equilibrium," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1996013, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).

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