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A Stochastic Approach to Disequilibrium Macroeconomics

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  • Seppo Honkapohja
  • Takatoshi Ito

Abstract

In this paper, our aim is to develop an alternative approach to analyzing a macroeconomic model where markets do not clear. Earlier approaches have had difficulties in interpreting effective demand, a key concept in disequilibrium macroeconomics. We propose a new definition of effective demand similar to that of Svensson, Gale, and Green. Given the states of the markets, there is in general uncertainty about the amount of trades individuals can complete. Considering this uncertainty, each individual has to make binding trade offers, i.e., effective demands, a fraction of which will be actually transacted. Using the newly-defined effective demand, we define the rationing equilibrium as a fixed point of disequilibrium signals. We analyze various regimes of rationing equilibria. The most startling conclusion is the multiplicity of equilibria: (1) given wages and prices, there may exist more than one type of equilibrium and (ii) even at Wairasian prices there may exist non-Walrasian equilibria, and these are usually stable with respect to a quantity-adjustment mechanism while the Wairasian equilibrium is unstable, The comparative-static properties of policy we also considered, and they are comparable to those of the earlier approach.

Suggested Citation

  • Seppo Honkapohja & Takatoshi Ito, 1979. "A Stochastic Approach to Disequilibrium Macroeconomics," NBER Technical Working Papers 0001, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberte:0001
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    References listed on IDEAS

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    1. Svensson, Lars E O, 1981. " Effective Demand in a Sequence of Markets," Scandinavian Journal of Economics, Wiley Blackwell, vol. 83(1), pages 1-21.
    2. Muellbauer, John & Portes, Richard, 1978. "Macroeconomic Models with Quantity Rationing," Economic Journal, Royal Economic Society, vol. 88(352), pages 788-821, December.
    3. Hildenbrand, Kurt & Hildenbrand, Werner, 1978. "On Keynesian equilibria with unemployment and quantity rationing," Journal of Economic Theory, Elsevier, vol. 18(2), pages 255-277, August.
    4. Martin Neil Baily, 1978. "Stabilization Policy and Private Economic Behavior," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(1), pages 11-60.
    5. Jean-Pascal Benassy, 1975. "Neo-Keynesian Disequilibrium Theory in a Monetary Economy," Review of Economic Studies, Oxford University Press, vol. 42(4), pages 503-523.
    6. Steven C. Salop, 1978. "Rational expectations and multiple equilibria: love, faith, money and underemployment," Special Studies Papers 106, Board of Governors of the Federal Reserve System (U.S.).
    7. 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 241-254, April.
    8. 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 301-320, June.
    9. Rothschild, Michael, 1973. "Models of Market Organization with Imperfect Information: A Survey," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1283-1308, Nov.-Dec..
    10. Duncan K. Foley & Martin F. Hellwig, 1975. "Asset Management with Trading Uncertainty," Review of Economic Studies, Oxford University Press, vol. 42(3), pages 327-346.
    11. Bohm, Volker, 1978. "Disequilibrium dynamics in a simple macroeconomic model," Journal of Economic Theory, Elsevier, vol. 17(2), pages 179-199, April.
    12. Barro, Robert J & Grossman, Herschel I, 1971. "A General Disequilibrium Model of Income and Employment," American Economic Review, American Economic Association, vol. 61(1), pages 82-93, March.
    13. Ito, Takatoshi, 1979. "An example of a non-Walrasian equilibrium with stochastic rationing at the Walrasian equilibrium prices," Economics Letters, Elsevier, vol. 2(1), pages 13-19.
    14. Gourieroux, C & Laffont, J J & Monfort, A, 1980. "Coherency Conditions in Simultaneous Linear Equation Models with Endogenous Switching Regimes," Econometrica, Econometric Society, vol. 48(3), pages 675-695, April.
    15. Robert J. Barro & Herschel I. Grossman, 1974. "Suppressed Inflation and the Supply Multiplier," Review of Economic Studies, Oxford University Press, vol. 41(1), pages 87-104.
    16. Gourieroux, C & Laffont, J-J & Monfort, A, 1980. "Disequilibrium Econometrics in Simultaneous Equations Systems," Econometrica, Econometric Society, vol. 48(1), pages 75-96, January.
    17. Phelps, Edmund S & Taylor, John B, 1977. "Stabilizing Powers of Monetary Policy under Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 163-190, February.
    18. Seppo Honkapohja & Takatoshi Ito, 1979. "Non-Trivial Equilibrium in an Economy With Stochastic Rationing," NBER Working Papers 0322, National Bureau of Economic Research, Inc.
    19. Grossman, Herschel I, 1971. "Money, Interest, and Prices in Market Disequilibrium," Journal of Political Economy, University of Chicago Press, vol. 79(5), pages 943-961, Sept.-Oct.
    20. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
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