The Nature of Equilibrium in Macroeconomics: A Critique of Equilibrium Search Theory
AbstractThe standard Walrasian equilibrium theory requires that the marginal value product of production factor such as labor is equal across firms and industries. However, productivity dispersion is widely observed in the real economy. Search theory allegedly fills this gap by encompassing apparent disequilibrium phenomena in the neoclassical equilibrium framework. Taking up Lucas and Prescott (1974) as a primary example, we show that the neoclassical search theory cannot explain the observed pattern of productivity dispersion. Non-self-averaging, a concept little known to economists, plays the major role. Empirical observation suggests strongly the presence of disturbing forces which dominate equilibrating forces due to optimizing behavior of economic agents. We must seek a new concept of equilibrium different from the standard Walrasian equilibrium in macroeconomics. --
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Bibliographic InfoPaper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2008-37.
Date of creation: 2008
Date of revision:
Equilibrium; search theory; productivity dispersion; power-law; non-self-averaging;
Other versions of this item:
- Aoki, Masanao & Yoshikawa, Hiroshi, 2009. "The nature of equilibrium in macroeconomics: a critique of equilibrium search theory," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 3(37), pages 1-9.
- J64 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Unemployment: Models, Duration, Incidence, and Job Search
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
- D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-01-03 (All new papers)
- NEP-DGE-2009-01-03 (Dynamic General Equilibrium)
- NEP-HPE-2009-01-03 (History & Philosophy of Economics)
- NEP-MAC-2009-01-03 (Macroeconomics)
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