A dynamic microeconomic model with durable goods and adaptive expectations

This paper develops a new model of a dynamic economy with durable goods that is simple enough so that interesting examples can be solved, even with limited computational capacity. The model is of temporary equilibrium in continuous time, with money, bonds and durable goods. Individuals form estimates of the marginal values of assets through a learning process of adaptive expectations. Properties of existence and uniqueness are shown for the equilibrium prices. A simple example is considered, to show how the model can simulate many of the dynamic adjustment problems of the business cycle.