SFB 303 Discussion Paper No. A-465

Author: Hens, Thorsten

Title: On the Stability of Intertemporal Equilibria with Rational Expectations

Abstract: In this paper we propose a concept of stability for intertemporal equilibria with rational expectations: current period prices move proportionally to current period excess demand while future prices are formed according to the perfect foresight hypothesis. It is shown that this process is locally asymptotically stable if all goods are gross substitutes, or if the equilibrium has no trade. In general this process differs from a process in contingent cotracts prices and from a tâtonnement in asset and spot market prices. It also differs from Hicks' and exceptional stability. In an intertemporal variant of Scarf's example on the instability of the Walrasian tâtonnement process it will be seen that the stability notion we propose is more stable than any other process investigated so far.

Keywords: Stability, rational expectations, general equilibrium

JEL-Classification-Number: D52, D54, D84

Creation-Date: November 1994
URL: ../1994/a/bonnsfa465.pdf
Graphic Part: ../1994/a/bonnsfa465gr.pdf

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