IDEAS home Printed from https://ideas.repec.org/a/spr/eaiere/v21y2024i2d10.1007_s40844-024-00282-2.html
   My bibliography  Save this article

Stability of price and quantity to a long-run equilibrium: a dynamic Leontief model with bounded rationality

Author

Listed:
  • Yangyuzi Wang

    (Tohoku University)

Abstract

The notorious ‘dual stability’ paradox is stated as follows: in a closed dynamic Leontief model, when the quantity system is relatively stable, its corresponding price system will be unstable, and vice versa. This paradox arises from the neoclassical assumptions of full utilization of capacity and perfect foresight, which have caused serious complications in the dynamic Leontief model. In this study, we aim to construct a dynamic input–output model within an evolutionary framework, departing from neoclassical assumptions. Two new assumptions are introduced: incomplete utilization of capital stocks and bounded rationality in decision-making. Our findings reveal that the ‘dual stability’ paradox of the quantity and price systems can be addressed by including these two assumptions, and some special conditions are proposed for the stability properties in both the systems. Furthermore, we prove that the distance between the time paths and equilibrium position converges to a constant, which is related to the initial position.

Suggested Citation

  • Yangyuzi Wang, 2024. "Stability of price and quantity to a long-run equilibrium: a dynamic Leontief model with bounded rationality," Evolutionary and Institutional Economics Review, Springer, vol. 21(2), pages 349-372, September.
  • Handle: RePEc:spr:eaiere:v:21:y:2024:i:2:d:10.1007_s40844-024-00282-2
    DOI: 10.1007/s40844-024-00282-2
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s40844-024-00282-2
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.

    File URL: https://libkey.io/10.1007/s40844-024-00282-2?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Zaghini, Enrico, 1991. "Prices and Production Levels in the Closed Dynamic Input-Output System," The Manchester School of Economic & Social Studies, University of Manchester, vol. 59(3), pages 274-294, September.
    2. Zaghini, Enrico, 1971. "Solow Prices and the Dual Stability Paradox in the Leontief Dynamic System," Econometrica, Econometric Society, vol. 39(3), pages 625-632, May.
    3. Filippini, Luigi, 1983. "Price and quantity adjustment in a dynamic closed model: The dual stability theorem," Journal of Macroeconomics, Elsevier, vol. 5(2), pages 185-196.
    4. Masahiko Aoki, 1977. "Dual Stability in a Cambridge-type Model," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(1), pages 143-151.
    5. Takayama,Akira, 1985. "Mathematical Economics," Cambridge Books, Cambridge University Press, number 9780521314985, November.
    6. George William Evans, 2001. "Expectations in Macroeconomics Adaptive versus Eductive Learning," Revue économique, Presses de Sciences-Po, vol. 52(3), pages 573-582.
    7. Harry Bloch, 2022. "The language of pluralism from the history of the theory of price determination: Natural price, equilibrium price and administered price," Metroeconomica, Wiley Blackwell, vol. 73(4), pages 1094-1111, November.
    8. Zaghini, Enrico, 1971. "Solow Prices and the Dual Stability Paradox in the Leontief Dynamic System: A Reply," Econometrica, Econometric Society, vol. 39(3), pages 634-634, May.
    9. Dumenil, Gerard & Levy, Dominique, 1987. "The Dynamics of Competition: A Restoration of the Classical Analysis," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 11(2), pages 133-164, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yasuhide Okuyama & Michael Sonis & Geoffrey Hewings, 2006. "Typology of structural change in a regional economy: a temporal inverse analysis," Economic Systems Research, Taylor & Francis Journals, vol. 18(2), pages 133-153.
    2. Kiedrowski, Roman, 2018. "Profit rates equalization and balanced growth in a multi-sector model of classical competition," Journal of Mathematical Economics, Elsevier, vol. 77(C), pages 39-53.
    3. Jian Jin & Haoran Zhou, 2023. "A Demand-Side Inoperability Input–Output Model for Strategic Risk Management: Insight from the COVID-19 Outbreak in Shanghai, China," Sustainability, MDPI, vol. 15(5), pages 1-22, February.
    4. Gontijo, Cláudio, 2000. "On the Criticism to the Classical Method," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 54(1), January.
    5. Maćkowiak, Piotr, 2009. "Adaptive Rolling Plans Are Good," MPRA Paper 42043, University Library of Munich, Germany.
    6. Berardi, Michele, 2007. "Heterogeneity and misspecifications in learning," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3203-3227, October.
    7. Ambrus, Attila & Pathak, Parag A., 2011. "Cooperation over finite horizons: A theory and experiments," Journal of Public Economics, Elsevier, vol. 95(7), pages 500-512.
    8. Inkoo Cho & Noah Williams, 2024. "Collusive Outcomes Without Collusion," Papers 2403.07177, arXiv.org.
    9. Volha Audzei & Sergey Slobodyan, 2024. "Dynamic Sparse Restricted Perceptions Equilibria," CERGE-EI Working Papers wp792, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    10. Pablo D. Fajgelbaum & Edouard Schaal, 2020. "Optimal Transport Networks in Spatial Equilibrium," Econometrica, Econometric Society, vol. 88(4), pages 1411-1452, July.
    11. Tasneem, Faria & Waters, George, 2017. "Forecasting MISO Electricity Prices: A Threshold Autoregressive Approach with Load Data," Journal of Regional Analysis and Policy, Mid-Continent Regional Science Association, vol. 48(3), October.
    12. George W. Evans & Seppo Honkapohja, 2009. "Robust Learning Stability with Operational Monetary Policy Rules," Central Banking, Analysis, and Economic Policies Book Series, in: Klaus Schmidt-Hebbel & Carl E. Walsh & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy under Uncertainty and Learning, edition 1, volume 13, chapter 5, pages 145-170, Central Bank of Chile.
    13. Warne, Anders, 2023. "DSGE model forecasting: rational expectations vs. adaptive learning," Working Paper Series 2768, European Central Bank.
    14. Mathieu Pedemonte & Hiroshi Toma & Esteban Verdugo, 2023. "Aggregate Implications of Heterogeneous Inflation Expectations: The Role of Individual Experience," Working Papers 23-04, Federal Reserve Bank of Cleveland.
    15. Paolo Bertoletti & Giorgio Rampa, 2011. "On Marginal Returns and Inferior Inputs," Quaderni di Dipartimento 145, University of Pavia, Department of Economics and Quantitative Methods.
    16. Marco Airaudo & Salvatore Nisticò & Luis‐Felipe Zanna, 2015. "Learning, Monetary Policy, and Asset Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(7), pages 1273-1307, October.
    17. Elizabeth Bersson & Patrick Hürtgen & Matthias Paustian, 2024. "Expectations Formation, Sticky Prices, and the ZLB," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(2-3), pages 365-393, March.
    18. Evans, George W. & Hommes, Cars & McGough, Bruce & Salle, Isabelle, 2022. "Are long-horizon expectations (de-)stabilizing? Theory and experiments," Journal of Monetary Economics, Elsevier, vol. 132(C), pages 44-63.
    19. Adriana Cornea‐Madeira & João Madeira, 2022. "Econometric Analysis of Switching Expectations in UK Inflation," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 84(3), pages 651-673, June.
    20. Viral V. Acharya & Matteo Crosignani & Tim Eisert & Christian Eufinger, 2023. "How Do Supply Shocks to Inflation Generalize? Evidence from the Pandemic Era in Europe," NBER Working Papers 31790, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Dynamic Leontief model; Fixed capital; Dual stability; Multi-sectoral model; Bounded rationality;
    All these keywords.

    JEL classification:

    • B4 - Schools of Economic Thought and Methodology - - Economic Methodology
    • B5 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:eaiere:v:21:y:2024:i:2:d:10.1007_s40844-024-00282-2. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.