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Equilibrium adjustment of disequilibrium prices

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  • Herings, Jean-Jacques
  • van der Laan, Gerard
  • Talman, Dolf
  • Venniker, Richard

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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  • Herings, Jean-Jacques & van der Laan, Gerard & Talman, Dolf & Venniker, Richard, 1997. "Equilibrium adjustment of disequilibrium prices," Journal of Mathematical Economics, Elsevier, vol. 27(1), pages 53-77, February.
  • Handle: RePEc:eee:mateco:v:27:y:1997:i:1:p:53-77
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    Cited by:

    1. Sander van der Hoog, 2004. "Credit and Cash-in-Advance in Disequilibrium Models," Computing in Economics and Finance 2004 294, Society for Computational Economics.
    2. van der Laan, G. & Talman, A.J.J., 2002. "Dynamic Adjustment of Supply Constrained Disequilibria to Walrasian Equilibrium," Discussion Paper 2002-61, Tilburg University, Center for Economic Research.
    3. Herings,P. Jean-Jacques, 2000. "Universally Stable Adjustment Processes - A Unifying Approach -," Research Memorandum 006, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    4. 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).
    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, Jean-Jacques & van der Laan, Gerard & Venniker, Richard, 1998. "The transition from a Dreze equilibrium to a Walrasian equilibrium1," Journal of Mathematical Economics, Elsevier, vol. 29(3), pages 303-330, April.
    8. Jean-Jacques Herings, P., 2002. "Universally converging adjustment processes--a unifying approach," Journal of Mathematical Economics, Elsevier, vol. 38(3), pages 341-370, November.

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