Indeterminateness of equilibria and macroeconomics
The paper reviews results on indeterminateness of equilibria in two extensions of the standard (Arrow-Debreu) model of general equilibrium. These extensions, motivated by macroeconomic interpretations, concern money and price rigidities. In a natural extension to money (held for transaction purposes), if monetary policy fixes either nominal interest rates or moneysupply (but not both), the variability of inflation rates is unrestricted, at equilibrium. In the absence of initial nominal asset positions, the indeterminateness of inflation rates is harmless, in the complete-markets framework of Arrow-Debreu. When some relative prices are predetermined, there exists generically a continuum of real equilibria, indexed bythe overall degree of rationing. In a model combining money and nominal price rigidities, the fixed nominal prices limit the indeterminateness of inflation rates, but the real indeterminateness subsits. When one introduces in addition a tatonnement process of nominal price formation, incorporatingsome downward nominal rigidities, both the nominal and the real indeterminateness may be eliminated (through the initial conditions), in the complete-markets framework. It is argued that macroeconomic interpretations call for an incomplete-markets framework, hence for expectations, another source of indeterminateness. A concludingsection offers some heuristic remarks on the open problems associated with market incompleteness.
|Date of creation:||00 Dec 2001|
|Date of revision:|
|Contact details of provider:|| Postal: Voie du Roman Pays 34, 1348 Louvain-la-Neuve (Belgium)|
Fax: +32 10474304
Web page: http://www.uclouvain.be/core
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Frank Hahn & Robert Solow, 1997. "A Critical Essay on Modern Macroeconomic Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 026258154x, March.
- Gaetano Bloise & Jacques Dréze & Herakles Polemarchakis, 2005.
"Monetary equilibria over an infinite horizon,"
Springer;Society for the Advancement of Economic Theory (SAET), vol. 25(1), pages 51-74, 01.
- Gaetano Bloise & J. H. Dreze & H. M. Polemarchakis, 2003. "Monetary Equilibria over an Infinite Horizon," Discussion Papers 03-19, University of Copenhagen. Department of Economics.
- BLOISE, Gaetano & DREZE, Jacques H. & POLEMARCHAKIS, Herakles M., . "Monetary equilibria over an infinite horizon," CORE Discussion Papers RP 1750, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
- Richard Clarida & Jordi Gali & Mark Gertler, 1999.
"The Science of Monetary Policy: A New Keynesian Perspective,"
NBER Working Papers
7147, National Bureau of Economic Research, Inc.
- Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
- Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
- Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
- Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
- Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier.
- DEHEZ, Pierre & DREZE, Jacques H., .
"On supply-constrained equilibria,"
CORE Discussion Papers RP
576, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- CITANNA, Alessandro & CRES, Herve & DREZE, Jacques & HERINGS, Jean-Jacques & VILLANACCI, Antonio, 2001.
"Continua of underemployment equilibria reflecting coordination failures, also at Walrasian prices,"
Les Cahiers de Recherche
732, HEC Paris.
- Citanna, Alessandro & Cres, Herve & Dreze, Jacques & Herings, P. Jean-Jacques & Villanacci, Antonio, 2001. "Continua of underemployment equilibria reflecting coordination failures, also at Walrasian prices," Journal of Mathematical Economics, Elsevier, vol. 36(3), pages 169-200, December.
- Alessandro Citanna & Hervé Crès & Jacques H. Drèze & Jean-Jacques Herings & Antonio Villanacci, 2001. "Continua of Underemployment Equilibria Reflecting Coordination Failures, Also at Walrasian Prices," Working Papers hal-00597197, HAL.
- Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, vol. 62(1), pages 1-18, March.
- Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 345-80.
- Herings, P.J.J. & Dreze, J., 1998.
"Continua of Underemployment Equilibria,"
1998-05, Tilburg University, Center for Economic Research.
- 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.
When requesting a correction, please mention this item's handle: RePEc:cor:louvco:2001058. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Alain GILLIS)
If references are entirely missing, you can add them using this form.