Equilibrium adjustment of disequilibrium prices

P.J.J. Herings, G. van der Laan, A.J.J. Talman, R. Venniker

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Abstract

We consider an exchange economy in which price rigidities are present. In the short run the non-numeraire commodities have a exible price level with respect to the numeraire commodity but their relative prices are mutually fixed. In the long run prices are assumed to be completely exible. For a given price level and fixed relative prices, markets can be equilibrated by means of quantity rationing on demand and supply. Keeping markets in equilibrium through rationing, we provide an adjustment process in prices and quantities converging from a trivial equilibrium with complete demand rationing on all non-numeraire markets to a Walrasian equilibrium. Along the path initially all relative prices are kept fixed and the price level is increased. Rationing schemes are adjusted to keep markets in equilibrium. Doing so the process reaches a short run equilibrium with only demand rationing and no rationing on the numeraire and at least one of the other commodities. The process allows for a downward price adjustment of non-rationed non-numeraire commodities and reaches a Walrasian equilibrium in the long run.
Original languageEnglish
PublisherUnknown Publisher
Number of pages32
Volume1994-84
Publication statusPublished - 1994

Publication series

NameCentER Discussion Paper
Volume1994-84

Keywords

  • Equilibrium Theory
  • market economy
  • Prices
  • Disequilibrium Theory
  • Rationing
  • economic theory

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