General equilibrium and the new neoclassical synthesis |
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Authors: | P Jean-Jacques Herings |
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Institution: | 1. Department of Economics, Maastricht University, P.O. Box 616, Maastricht, MD?, 6200, The Netherlands
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Abstract: | We present a general equilibrium model of the new neoclassical synthesis that has the same level of generality as the Arrow–Debreu model. This involves a stochastic multi-period economy with a monetary sector and sticky commodity prices. We formulate the notion of a sticky price equilibrium where all agents form rational expectations on prices for commodities and assets, interest rates, and rationing. We present a general result showing that monetary policy imposes no restrictions whatsoever on nominal equilibrium price levels and that the set of sticky price equilibria has a dimension equal to the number of terminal date-events. Stickiness of prices implies that this indeterminacy is real. |
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