Analytical models of disequilibrium growth and macrodynamics.

Abstract

Disequilibrium analysis, particularly in the context of explicit dynamic economic models, is an area of considerable interest. Disequilibrium is important when markets fail to clear and dynamic adjustments are required. Three essential strands of the literature seem the most important: non market-clearing temporary equilibria; long term growth theory which allows for the possibility of unemployment of labour and underutilisation of capital stock; medium term dynamics where aggregate demand fails to match up to potential output. This thesis presents a number of theoretical and analytical models which analyse various aspects of the last two issues. Even though we use some concepts from short-run rationing models of temporary equilibria, the central focus is exclusively on long run growth and more shorter-term dynamic systems, where capital stock is exogenous. The work is also emphatically macroeconomic in nature, emphasising aggregative structures which conform to stylised facts and have interesting policy conclusions. The first part of the thesis discusses growth models. Given the lack of a unified theoretical structure in the area itself, we concentrate on specific issues: income-expenditure models with independent investment functions leading on to capital formation and (possible) movement towards steady states; unemployment of labour, and capital; monetary growth and asset structure; open economy considerations when markets may fail to clear. The second part analyses macrodynamics, assuming fixed capital, and is concerned with medium term adjustments of variables such as output, price and exchange rate under disequilibrium and rigidities. The purpose of the research is to present a diversity of concepts and conclusions. The objective is not to present a comprehensive 'general' or 'meta' theory; it is not clear whether encompassing concepts will necessarily be more insightful; in any case the current state of the arts preclude such a schema. The chapters that follow deal with a wide range of possible topics; model specifications are adapted to tackle the specific problem at hand. The conclusions clearly demonstrate that specification of regime, Keynesian or Classical, is vital to the understanding of how the economy will behave under disequilibrium. Even if the steady state depends on exogenous parameters (such as the natural rate or potential output) the paths that approach it are essentially different in characteristics, depending on what sort of disequilibrium regime the economy is in. This, of course, has important policy relevance. Discretionary policies, as well as policy rules, must carefully study the underlying structural features of the economy if they are to have significance