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Crisis and theoretical methods: equilibrium and disequilibrium once again

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  • Duncan Foley

    () (Department of Economics, New School for Social Research)

Abstract

The financial crisis of 2007-8 damaged the credibility of macroeconomic analysis based on price-taking Walrasian intertemporal general equilibrium models. This talk explores methodological alternatives, particularly stable Nash-Cournot equilibria of social interaction models that center on agents’ response to other agents’ actions rather than on agents’ forecasts of future paths of prices and production. Social interaction equilibria in conjunction with constraints from information theory highlight the social coordination problems at the root of macroeconomic policy questions. Equilibrium concepts enhance the explanatory power of economic theories in contrast with the limitations of disequilibrium dynamical systems analysis and agent-based modeling. Constrained maximum entropy methods offer a general approach to macroeconomic modeling. Various conceptions of equilibrium in economics arise from distinct conceptions of expectations.

Suggested Citation

  • Duncan Foley, 2017. "Crisis and theoretical methods: equilibrium and disequilibrium once again," Working Papers 1703, New School for Social Research, Department of Economics.
  • Handle: RePEc:new:wpaper:1703
    as

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    File URL: http://www.economicpolicyresearch.org/econ/2017/NSSR_WP_032017.pdf
    File Function: First version, 2017
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    References listed on IDEAS

    as
    1. Sims, Christopher A., 2005. "Rational inattention: a research agenda," Discussion Paper Series 1: Economic Studies 2005,34, Deutsche Bundesbank.
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    More about this item

    Keywords

    Economic equilibrium; statistical equilibrium; Nash-Cournot equilibrium; expectations; maximum entropy;

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • B40 - Schools of Economic Thought and Methodology - - Economic Methodology - - - General
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian

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