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eBook details

• Title: Financial Markets and the Instability of General Equilibrium (Original PAPER)
• Author : Atlantic Economic Journal
• Release Date : January 01, 2009
• Genre: Business & Personal Finance,Books,
• Pages : * pages
• Size : 248 KB

Description

Introduction This essay employs some of the tools of general equilibrium theory and adds to this theory the explicit treatment of financial markets. This essay may be applied to explain the departure of the United States and European economies from full employment since the late 1960's, but especially to diagnose the recent disturbances to equilibrium on both continents. In the process, it casts doubt on the modern neoclassical position that an economy generally finds its way to stable full employment if allowed to find its way with only limited intervention by its government. A useful source for this view is Sargent (2008; 1987, Chs. I, XVIII, XIV) because he synthesized the views of several economists belonging to this camp. According to him, entrepreneurs commonly respond to market signals correctly but may temporarily confuse general price-level changes with local ones on their own particular markets. These errors soon find correction, so rationally acting firms make proper decisions by competition in some markets or through technological change. However, if they engage in proper search and are willing to accept a reduction in real wages when necessary, unemployment becomes temporary for the individual and small for the economy as a whole. In an evolutionary process, households and firms develop expectations which are rational in the sense that they have correct and similar models of the economy. Hence, they also interpret events, including government actions, correctly and optimize their individual expected returns. It is this view which is challenged below.

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