IDEAS home Printed from https://ideas.repec.org/p/cor/louvco/2001058.html
   My bibliography  Save this paper

Indeterminateness of equilibria and macroeconomics

Author

Listed:
  • DRÈZE, Jacques

Abstract

The paper reviews results on indeterminateness of equilibria in two extensions of the standard (Arrow-Debreu) model of general equilibrium. These extensions, motivated by macroeconomic interpretations, concern money and price rigidities. In a natural extension to money (held for transaction purposes), if monetary policy fixes either nominal interest rates or moneysupply (but not both), the variability of inflation rates is unrestricted, at equilibrium. In the absence of initial nominal asset positions, the indeterminateness of inflation rates is harmless, in the complete-markets framework of Arrow-Debreu. When some relative prices are predetermined, there exists generically a continuum of real equilibria, indexed bythe overall degree of rationing. In a model combining money and nominal price rigidities, the fixed nominal prices limit the indeterminateness of inflation rates, but the real indeterminateness subsits. When one introduces in addition a tatonnement process of nominal price formation, incorporatingsome downward nominal rigidities, both the nominal and the real indeterminateness may be eliminated (through the initial conditions), in the complete-markets framework. It is argued that macroeconomic interpretations call for an incomplete-markets framework, hence for expectations, another source of indeterminateness. A concludingsection offers some heuristic remarks on the open problems associated with market incompleteness.

Suggested Citation

  • DRÈZE, Jacques, 2001. "Indeterminateness of equilibria and macroeconomics," LIDAM Discussion Papers CORE 2001058, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:2001058
    as

    Download full text from publisher

    File URL: https://sites.uclouvain.be/core/publications/coredp/coredp2001.html
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Herings, P.J.J. & Dreze, J., 1998. "Continua of Underemployment Equilibria," Other publications TiSEM c82ec7ae-6be6-43a7-aa39-c, Tilburg University, School of Economics and Management.
    2. Gaetano Bloise & Jacques H. Drèze & Herakles M. Polemarchakis, 2006. "Monetary Equilibria over an Infinite Horizon," Studies in Economic Theory, in: Christian Schultz & Karl Vind (ed.), Institutions, Equilibria and Efficiency, chapter 5, pages 69-93, Springer.
    3. Lucas, Robert E, Jr & Stokey, Nancy L, 1987. "Money and Interest in a Cash-in-Advance Economy," Econometrica, Econometric Society, vol. 55(3), pages 491-513, May.
    4. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    5. Dehez, Pierre & Dreze, Jacques H., 1984. "On supply-constrained equilibria," Journal of Economic Theory, Elsevier, vol. 33(1), pages 172-182, June.
    6. Citanna, Alessandro & Cres, Herve & Dreze, Jacques & Herings, P. Jean-Jacques & Villanacci, Antonio, 2001. "Continua of underemployment equilibria reflecting coordination failures, also at Walrasian prices," Journal of Mathematical Economics, Elsevier, vol. 36(3), pages 169-200, December.
    7. Radner, Roy, 1979. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Econometrica, Econometric Society, vol. 47(3), pages 655-678, May.
    8. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    9. Herings, P.J.J., 1995. "Static and dynamic aspects of general disequilibrium theory," Other publications TiSEM 489c698d-c257-47a3-90bd-3, Tilburg University, School of Economics and Management.
    10. William J. Baumol, 1952. "The Transactions Demand for Cash: An Inventory Theoretic Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 66(4), pages 545-556.
    11. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 345-380.
    12. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 381-399.
    13. Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614, Elsevier.
    14. Frank Hahn & Robert Solow, 1997. "A Critical Essay on Modern Macroeconomic Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 026258154x, December.
    15. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-254, April.
    16. Tobin, James, 1972. "Inflation and Unemployment," American Economic Review, American Economic Association, vol. 62(1), pages 1-18, March.
    17. van der Laan, Gerard, 1984. "Supply-constrained fixed price equilibria in monetary economies," Journal of Mathematical Economics, Elsevier, vol. 13(2), pages 171-187, October.
    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. Philip Arestis & Alexander Mihailov, 2011. "Classifying Monetary Economics: Fields And Methods From Past To Future," Journal of Economic Surveys, Wiley Blackwell, vol. 25(4), pages 769-800, September.
    2. P. Herings, 2014. "General equilibrium and the new neoclassical synthesis," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 57(3), pages 437-477, November.
    3. Akhand Akhtar Hossain, 2009. "Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 12777.
    4. Bernardino Adão & Isabel Correia & Pedro Teles, 2004. "Monetary policy with single instrument feedback rules," Working Paper Series WP-04-30, Federal Reserve Bank of Chicago.
    5. John H. Cochrane, 2011. "Determinacy and Identification with Taylor Rules," Journal of Political Economy, University of Chicago Press, vol. 119(3), pages 565-615.
    6. Iwan Bos & Ronald Peeters & Erik Pot, 2017. "Competition versus collusion: The impact of consumer inertia," International Journal of Economic Theory, The International Society for Economic Theory, vol. 13(4), pages 387-400, December.
    7. Michael Magill & Martine Quinzii, 2014. "Term structure and forward guidance as instruments of monetary policy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 56(1), pages 1-32, May.
    8. McMahon, Michael & Peiris, M. Udara & Polemarchakis, Herakles, 2018. "Perils of unconventional monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 93(C), pages 92-114.
    9. Eric M. Leeper, 2009. "Anchors Away: How Fiscal Policy Can Undermine the Taylor Principle," NBER Working Papers 15514, National Bureau of Economic Research, Inc.
    10. McCallum, Bennett T., 1999. "Issues in the design of monetary policy rules," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 23, pages 1483-1530, Elsevier.
    11. Magill, Michael & Quinzii, Martine, 2014. "Anchoring expectations of inflation," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 86-105.
    12. Herings, P. Jean-Jacques & van der Laan, Gerard & Talman, Dolf, 2009. "Equilibria with coordination failures," Journal of Mathematical Economics, Elsevier, vol. 45(1-2), pages 23-37, January.
    13. Alexis Anagnostopoulos & Omar Licandro & Italo Bove & Karl Schlag, 2007. "An Evolutionary Theory of Inflation Inertia," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 433-443, 04-05.
    14. Li Lin & Dimitrios P. Tsomocos & Alexandros P. Vardoulakis, 2016. "On default and uniqueness of monetary equilibria," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(1), pages 245-264, June.
    15. McMahon, Michael & Peiris, Udara & Polemarchakis, Herakles, 2015. "Perils of quantitative easing," CRETA Online Discussion Paper Series 04, Centre for Research in Economic Theory and its Applications CRETA.
    16. McCallum, Bennett T., 2003. "Multiple-solution indeterminacies in monetary policy analysis," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1153-1175, July.
    17. Heracles M. Polemarchakis & Jacques H. Drèze, 1995. "Monetary Equilibria," Working Papers hal-00607521, HAL.
    18. Bassetto, Marco & Phelan, Christopher, 2015. "Speculative runs on interest rate pegs," Journal of Monetary Economics, Elsevier, vol. 73(C), pages 99-114.
    19. Leith, Campbell & von Thadden, Leopold, 2008. "Monetary and fiscal policy interactions in a New Keynesian model with capital accumulation and non-Ricardian consumers," Journal of Economic Theory, Elsevier, vol. 140(1), pages 279-313, May.
    20. Bennett T. Mccallum, 2003. "Is The Fiscal Theory of the Price Level Learnable?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 50(5), pages 634-649, November.

    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:cor:louvco:2001058. 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: Alain GILLIS (email available below). General contact details of provider: https://edirc.repec.org/data/coreebe.html .

    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.