Uniqueness and Stability of Equilibrium in Economies with Two Goods

We offer new sufficient conditions ensuring demand is downward sloping local to equilibrium. It follows that equilibrium is unique and stable in the sense that rising supply implies falling prices. In our setting, there are two goods, which we interpret as consumption in different time periods, and many impatience types. Agents have the same Bernoulli utility function, but the types differ arbitrarily in time preference. Our main result is that if endowments are identical and utility displays nonincreasing absolute risk aversion, then market demand is strictly downward sloping local to equilibrium. We discuss implications for the Diamond-Dybvig literature

On the Recent Debate on Capital Theory and General Equilibrium

The paper disputes the negative conclusion of prof. Mandler on the thesis by Garegnani, Schefold, Parrinello that intertemporal general equilibrium theory too is undermined by reswitching and reverse capital deepening. The paper argues that Mandler’s conclusion rests upon highly criticisable assumptions that render the equations of intertemporal general equilibrium identical to those of general equilibria without capital goods. The Walrasian treatment of the capital endowment is criticized in Part I on the basis of its insufficient persistence, and of other ‘methodological’ criticisms that are systematically surveyed. In Part II it is shown through a numerical example that Mandler’s claim, that the assumption of a single consumer guarantees uniqueness of intertemporal equilibrium independently of reswitching or reverse capital deepening, rests on the absence of production of capital goods in the last period of the equilibrium; this assumption is thus revealed to be one of the tricks that prevents the existence of capital goods from changing the properties of the equilibrium relative to those of equilibria without capital

General Equilibrium without Utility Functions: How far to go?

How far can we go in weakening the assumptions of the general equilibrium model? Existence of equilibrium, structural stability and finiteness of equilibria of regular economies, genericity of regular economies and an index formula for the equilibria of regular economies have been known not to require transitivity and completeness of consumers’ preferences. We show in this paper that if consumers’ non-ordered preferences satisfy a mild version of convexity already considered in the literature, then the following properties are also satisfied: 1) the smooth manifold structure and the diffeomorphism of the equilibrium manifold with a Euclidean space; 2) the diffeomorphism of the set of no-trade equilibria with a Euclidean space; 3) the openness and genericity of the set of regular equilibria as a subset of the equilibrium manifold; 4) for small trade vectors, the uniqueness, regularity and stability of equilibrium for two version of tatonnement; 5) the pathconnectedness of the sets of stable equilibria.general equilibrium; equilibrium manifold; natural projection; demand functions

Monetary Policy Challenges in Emerging Markets: Sudden Stop, Liability Dollarization, and Lender of Last Resort

The paper argues that Emerging Market economies (EMs) face financial vulnerabilities that weaken the effectiveness of a domestic Lender of Last Resort (LOLR). As a result, monetary policy is inextricably linked to the state of the credit market. In particular, the central bank should be ready to operate as LOLR during Sudden Stop (of capital inflows) by releasing international reserves in an effective manner. These conditions also impact on optimal monetary policy in normal but high-volatility periods. The paper further argues that during those periods interest rate rules may engender excessive volatility of exchange rates and, thus, that it may be advisable to temporarily supplement those rules by foreign exchange market intervention or outright exchange rate pegging. At a fundamental level, the analysis suggests that the state-of-the-art literature summarized by Woodford (2003) or even more heterodox approaches exemplified by Stiglitz and Greenwald (2003) likely fall short of providing a satisfactory guide for monetary policy in EMs.

The Butterfly Effect of Small Open Economies

The rational expectations equilibrium of a small open economy can be subject to indeterminacy if foreign monetary policy does not satisfy the Taylor principle. We study the implications of foreign-induced indeterminacy for the conduct of monetary policy in a small open economy. In the canonical sticky-price small open economy model, we find that indeterminacy arising in the large economy can increase the volatility of the small economy. Our main finding, however, is that ‘smallness’ is a property of the unique rational expectations equilibrium of the large economy, and not a general property of the small open economy model. If the large economy fails to anchor expectations, shocks to the small economy can affect the large one. This form of indeterminacy gives rise to a ‘butterfly effect’. Additional assumptions are required to preserve the ‘smallness’ of the small economy.indeterminacy; small open economy; rational expectations

Embodied technical progress and Unemployment

In this paper we build up a canonical vintage capital model with embodied and disembodied technical progress and generalized Nash bargaining in the labor market. First, we handle both types of technical progress as exogenous, but we endogenize them after. In these setups, we comprehensively study the relations between technical progress, unemployment, and job creation and destruction in the short and long run.unemployment; job creation and destruction; embodied technical progress

CK-Equilibria and Informational Efficiency in a Competitive Economy

We consider a very simple competitive economy with infinitesimal agents and asymmetric information. We define a Common Knowledge (CK hereafter) Equilibrium as a price distribution compatible with CK of market clearing and rationality. At equilibrium, expectational mistakes and incorrect information revelation by price are possible. But, whenever unique, the CK equilibrium is a fully revealing Rational Expectations Equilibrium. Hence uniqueness of equilibrium means market informational efficiency. We give different conditions of uniqueness of equilibrium bearing on the information structure. The first ones emphasize that many informed agents are required for market efficiency. Agents need not be perfectly informed, but each "piece" of information has to be known by a large enough proportion of the population. The main result is a characterization of the information structures allowing for local uniqueness: multiplicity of equilibria obtains when all the agents have to extract information from the price to obtain information about the same event. We show that this result holds in an exchange economy with finitely many goods and generic preferences. Finally, we provide a simple market game in which the CK-equilibria obtain through infinitely repeated elimination of weakly dominated strategies.

Rule-of-Thumb Consumers and the Design of Interest Rate Rules

We introduce rule-of-thumb consumers in an otherwise standard dynamic sticky price model, and show how their presence can change dramatically the properties of widely used interest rate rules. In particular, the existence of a unique equilibrium is no longer guaranteed by an interest rate rule that satisfies the so called Taylor principle. Our findings call for caution when using estimates of interest rate rules in order to assess the merits of monetary policy in specific historical periods.

Monetary Policy Challenges in Emerging Markets: Sudden Stop, Liability Dollarization, and Lender of Last Resort

The paper argues that Emerging Market economies (EMs) face financial vulnerabilities that weaken the effectiveness of a domestic Lender of Last Resort (LOLR). As a result, monetary policy is inextricably linked to the state of the credit market. In particular, the central bank should be ready to operate as LOLR during Sudden Stop (of capital inflows) by releasing international reserves in an effective manner. These conditions also impact on optimal monetary policy in normal but high-volatility periods. The paper further argues that during those periods interest rate rules may engender excessive volatility of exchange rates and, thus, that it may be advisable to temporarily supplement those rules by foreign exchange market intervention or outright exchange rate pegging. At a fundamental level, the analysis suggests that the state-of-the-art literature summarized by Woodford (2003) or even more heterodox approaches exemplified by Stiglitz and Greenwald (2003) are likely fall short of providing a satisfactory guide for monetary policy in EMs.