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Temporary Equilibrium, Expectations and Notional Spillovers

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  • Ellis, Christopher J.

Abstract

In most temporary equilibrium models the market operates as follows. At the start of the market period the relative price vector is announced. Agents (consumers and producers) then compute and announce their initial market offers based upon Walrasian supply and demand curves. If the relative price vector is not the Walrasian constellation then some market offers go unsatisfied and markets clear on the "short side". Agents who face a quantity constraint on one market adjust their behaviour upon others in an attempt to achieve levels of transactions consistent with the solution to their constrained utility maximisation problems. However, this approach assumes sufficient flexibility within each market period to allow behaviour in each market to adjust completely to the quantity constraints actually experienced in other markets in the same period. It can be argued that such flexibility is less than perfect, particuarly in the upward direction. In that case, agents will have to base their initial offers not merely on the fixed prices, but also upon their expectations of quantity constraints in other markets. It is these offers that are confronted in each market within a market period. They can be revised downwards, but not upwards, if the actual quantity constraints in other markets turn out to be different from those expected. With this mechanism, each period's markets clear by the familiar quantity adjustment. This will be shown to generate three new types of temporary equilibria termed "expectational" keynesian, Classical, and Repressed Inflation. These new temporary equilibria will be shown to have interested intra period adjustment properties.

Suggested Citation

  • Ellis, Christopher J., 1980. "Temporary Equilibrium, Expectations and Notional Spillovers," The Warwick Economics Research Paper Series (TWERPS) 165, University of Warwick, Department of Economics.
  • Handle: RePEc:wrk:warwec:165
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    File URL: https://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/1978-1988/twerp165.pdf
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