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Underemployment Equilibrium with Rational Expectations

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  • Geoffrey Woglom

Abstract

In this paper I use some recent work in the microeconomics of imperfect information to construct a macro model. The microeconomic theory suggests that atomistically competitive firms face kinked demand curves. In this model there is a range of aggregate equilibria consistent with correct information. I then show that individual firms can face a free-rider problem in trying to move from one equilibrium to another by changing the price level. Monetary policy is not subject to this problem, even if the policy is fully anticipated.

Suggested Citation

  • Geoffrey Woglom, 1982. "Underemployment Equilibrium with Rational Expectations," The Quarterly Journal of Economics, Oxford University Press, vol. 97(1), pages 89-107.
  • Handle: RePEc:oup:qjecon:v:97:y:1982:i:1:p:89-107.
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    File URL: http://hdl.handle.net/10.2307/1882628
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    References listed on IDEAS

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    1. Robert D. Willig, 1978. "Pareto-Superior Nonlinear Outlay Schedules," Bell Journal of Economics, The RAND Corporation, vol. 9(1), pages 56-69, Spring.
    2. Sheshinski, Eytan, 1976. "Price, Quality and Quantity Regulation in Monopoly Situations," Economica, London School of Economics and Political Science, vol. 43(17), pages 127-137, May.
    3. Elizabeth E. Bailey & Lawrence J. White, 1974. "Reversals in Peak and Offpeak Prices," Bell Journal of Economics, The RAND Corporation, vol. 5(1), pages 75-92, Spring.
    4. Boiteux, M., 1971. "On the management of public monopolies subject to budgetary constraints," Journal of Economic Theory, Elsevier, vol. 3(3), pages 219-240, September.
    5. Yew-Kwang Ng & Mendel Weisser, 1974. "Optimal Pricing with a Budget Constraint—The Case of the Two-part Tariff," Review of Economic Studies, Oxford University Press, vol. 41(3), pages 337-345.
    6. Waverman, Leonard, 1975. "Peak-Load Pricing under Regulatory Constraint: A Proof of Inefficiency," Journal of Political Economy, University of Chicago Press, vol. 83(3), pages 645-654, June.
    7. Martin S. Feldstein, 1972. "Equity and Efficiency in Public Sector Pricing: The Optimal Two-Part Tariff," The Quarterly Journal of Economics, Oxford University Press, vol. 86(2), pages 175-187.
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    Cited by:

    1. Harald Stahl, 2010. "Price adjustment in German manufacturing: evidence from two merged surveys," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 31(2-3), pages 67-92.
    2. Michelle L. Barnes & Giovanni P. Olivei, 2003. "Inside and outside bounds: threshold estimates of the Phillips curve," New England Economic Review, Federal Reserve Bank of Boston, pages 3-18.
    3. Lévesque, Suzanne & Paquin, Lloyd, 1986. "Les microfondements de la macroéconomique : une recension critique," L'Actualité Economique, Société Canadienne de Science Economique, vol. 62(4), pages 597-619, décembre.
    4. Kleshchelski, Isaac & Vincent, Nicolas, 2009. "Market share and price rigidity," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 344-352, April.
    5. Kimball, Miles S, 1995. "The Quantitative Analytics of the Basic Neomonetarist Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1241-1277, November.
    6. Hasan Bakhshi & Pablo Burriel-Llombart, 2003. "Endogenous Price Stickiness, Trend Inflation, and the New Keynesian Phillips Curve," Computing in Economics and Finance 2003 12, Society for Computational Economics.
    7. Bakhshi, Hasan & Khan, Hashmat & Burriel-Llombart, Pablo & Rudolf, Barbara, 2007. "The New Keynesian Phillips curve under trend inflation and strategic complementarity," Journal of Macroeconomics, Elsevier, vol. 29(1), pages 37-59, March.
    8. Goodfriend, Marvin, 1997. "A framework for the analysis of moderate inflations," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 45-65, June.
    9. Coenen, Gunter & Levin, Andrew T. & Christoffel, Kai, 2007. "Identifying the influences of nominal and real rigidities in aggregate price-setting behavior," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2439-2466, November.
    10. Bouakez, Hafedh, 2005. "Nominal rigidity, desired markup variations, and real exchange rate persistence," Journal of International Economics, Elsevier, vol. 66(1), pages 49-74, May.
    11. Ronald Balvers, 1992. "A Keynesian general equilibrium model with competitive firms and rational expectations," Journal of Economics, Springer, vol. 56(1), pages 23-38, February.
    12. Alexander L. Wolman, 2007. "The frequency and costs of individual price adjustment," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(6), pages 531-552.
    13. Ian McDonald, 2009. "Behavioural Macroeconomics And Wage And Price Setting: Developing Some Early Insights Of John Maynard Keynes And Joan Robinson," CAMA Working Papers 2009-11, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    14. S. Dupraz, 2017. "A Kinked-Demand Theory of Price Rigidity," Working papers 656, Banque de France.
    15. Victor Zarnowitz, 1989. "Cost and Price Movements in Business Cycle Theories and Experience: Hypotheses of Sticky Wages and Prices (SEE ALSO WP3132-send out together)," NBER Working Papers 3131, National Bureau of Economic Research, Inc.
    16. Michael Woodford, 1990. "Self-Fulfilling Expectations and Fluctuations in Aggregate Demand," NBER Working Papers 3361, National Bureau of Economic Research, Inc.

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