By Jacques Drèze
Prime students examine a number particular departures from common equilibrium conception that have major implications for the macroeconomic research of either constructed and constructing economies. Jacques Dr?ze considers uncertainty and incomplete markets and Nobel Laureate Robert Solow relates development concept to the macroeconomic framework. different concerns tested are the consequences for macro-policy of latest examine, together with Joseph Stiglitz's caution at the lost zeal for monetary industry liberalization which partially engendered the East Asian and Russian crises.
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Extra info for Advances in Macroeconomic Theory (International Economic Association Conference Volume No. 133)
My distinctive modelling assumption is an a priori given partition of commodities into two groups. Commodities in group I have flexible prices, their supplies or demands are never subject to quantity rationing. 25 Think about group II as including labour services, in particular unskilled labour, and goods which are produced from facilities entailing fixed costs. Think about the latter prices as equal to marginal cost plus a mark-up. The mark-up is precisely the price of the input ‘capacity’. Thus, the price rigidities concern non-storable inputs, for which recurrent under-utilization is empirically documented.
Two very strong assumptions are needed, sequentially complete markets and perfect foresight. The first assumption (not used by Radner) states that, although markets are incomplete, they permit agents at any date to transfer wealth across all the events at the following date; that is, markets are ‘one-period ahead complete’, and will be so again in the future. 16 Under these very strong assumptions, the sequence of temporary equilibria implements an equilibrium with complete markets. Hence, ArrowDebreu existence theorems carry over, as do stability theorems for Walrasian tâtonnement.
Thus, the price rigidities concern non-storable inputs, for which recurrent under-utilization is empirically documented. The exogenous partition and bounds on prices are not a fully general specification, but one that has proved usefully tractable. The equilibrium concept is always the supply-constrained equilibrium, as defined above. Now for the first theorem. Take as given the partition into group I and group II commodities, with group I non-empty; and take as given the prices of group II commodities, positive but arbitrary.