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Expectations and Stability with Gross Complements

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  • David G. Tarr

Abstract

Arrow and Nerlove (1958) have found that when all commodities, both present and future, in a continuous time general equilibrium model of a competitive economy, are gross substitutes, then stability with “static” expectations is equivalent to stability with “adaptive” expectations. It is found here that we may extend the Arrow-Nerlove result that the stability behaviour of the system is unaffected by the selection of the more sophisticated adaptive expectations over static expectations, provided the substitute-complement relationship of commodities, both present and future, fits into the Morishima (1952) matrix pattern. In addition, a counterexample is exhibited which establishes that the Arrow-Nerlove result does not hold in general and the choice of adaptive versus static expectations can affect stability…
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Suggested Citation

  • David G. Tarr, 1978. "Expectations and Stability with Gross Complements," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 45(3), pages 617-620.
    • Handle: RePEc:oup:restud:v:45:y:1978:i:3:p:617-620.
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    File URL: http://hdl.handle.net/10.2307/2297263
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    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations

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