Industrial Pricing and Growth Fluctuations in India

Goyal, Ashima (1994): Industrial Pricing and Growth Fluctuations in India. Published in: Indian Economic Review , Vol. 29, No. 1 (1994): pp. 13-32.

Abstract

In a simple 2 sector general equilibrium macromodel profit maximization by a representative firm leads to multiple long-run non-Walrasian equilibria with excess profits and excess capacity. The model is reduced to two non-linear differential equations. Using calibration and simulation it is shown that yearly non-agricultural price and output series for the Indian economy are reproduced along dynamic medium-run adjustment trajectories approaching one or other of the equilibria. Alternative mark-up hypotheses are tested. The simulations show that the medium-run mark-up is counter-cyclical but has little variation. This behaviour of the mark-up plays an important part in maintaining stability, and explaining the historical price and output series. The model therefore helps to provide a microfoundation for structuralist macroeconomics.

• Item Type: MPRA Paper
• Language: English
• Keywords: Microfoundations, countercyclical mark-ups, stability
• Subjects: D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D58 - Computable and Other Applied General Equilibrium Models; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles

References

Arrow, KJ. (1959). Towards a Theory of Price Adjustment, in Abrarnovitz, A. (ed), The Allocations of Economic Resources, Paolo Alto, Stanford University Press.

Barro, RJ. and S. Fischer (1976). Recent Developments in Monetary Theory, Journal of Monetary Economics, Vol 2, 133-167.

Benassy, J.P. (1982), The Economics of Market Disequilibrium. New York, Academic Press.

Benassy, J.P. (1993), Nonclearing Markets: Microeconomic Concepts and Macroeconomic Applications, Journal of Economic Literature, Vol 31. 732-761.

Diamond, P. and D. Fudenberg (1989), Rational Expectations Business cycles in Search Equilibrium, Journal of Political Economy, Vol 97. 606-619.

Fisher, F.M. (1976), The Stability of General Equilibrium: Results and Problems, in Artis M. and Nobay R. (eds), Essays in Economic Analysis. Cambridge. Cambridge University Press.

Goyal, A. (1989). The Short-Run Behavior of the Indian Economy and its Implications for Long-run Growth, unpublished Ph.D. Dissertation, Bombay University

Goyal, A. (1992). Demand Supply and Savings Constraints in the Indian Economy, Economic and Political Weekly, Vol 27. No. 17. 893-899.

Goyal, A. (1993b), The Role of Foreign Aid and the Foreign Exchange Constraint in Growth: Some Extension, Journal of Foreign Exchange and International Finance. Vol 7, 30-43.

Goyal, A. (1993a), Stability, Expectations and Bifurcations: A Characterization of Disequilibrium Growth Paths, Discussion Paper No. 90, India Gandhi Institute of Development Research, May.

Goyal, A. (1994b), Growth Dynamics: in a General Equilibrium Macroeconomic Model for India, Journal of Policy Modeling, 16 (3): 265-289.

Goyal, A. (1994a), Developing Economy Macroeconomics: Fresh Perspectives, Economic and Political Weekly. November 26, pp. 3041-3052.

Greenwald, B. and J. Stiglitz (1993), New and Old Keynesians,Journal of Economic Perspectives, Vol 7, 23-44.

Hahn, F. (1978), On non-Walrasian Equilibria, Review of Economic Studies, Vol 45, 1-17.

Hairault, 1.0. and Portier, F. (1993), Money, New-Keynesian Macroeconomics and the Business Cycle, European Economic Review, Vol 37, 1533-1568.

Ize, A. (1984), Disequilibrium Theories, Imperfect Competition and Income Distribution: A Fix-Price Analysis, Oxford Economic Papers, Vol 36, 348-58.

Judd, K.L. (1982), An Alternative to Steady-State Comparisons in Perfect Foresight Models, Economic Letters. Vol 10, 55-59.

Malinvaud, E. (1980), Profitability and Unemployment, Cambridge, Cambridge University Press.

Malinvaud, E. (1983), Notes on Growth Theory with Imperfectly Flexible Price, in Fitoussi (cd), Modern Macroeconomic Theory, Oxford, Basil Blackwell.

Mankiw G.N. and D. Romer (ed). (1991). New Keynesian Economics, New York, M.LT. Press.

Marglin, S. and Bhaduri, A. (1988). Profit Squeeze and Keynesian Theory, Wider Working Papers. April, Helsinki.

Neary, R. and Roberts K.W.S. (1980). The Theory of Household Behaviour Under Rationing, European Economic Review, Vol 13. 25-42.

Ng, Y.K., (1985), A Micro-macroeconomic Analysis based on a Representative Firm: Progress Report, in Feiwel, F.R. (ed), Issues in Contemporary Macroeconomics and Distribution, London, Macmillan Press.

Simon, H.A. (1956), Dynamic Programming Under Uncertainty with a Quadratic-Criterion Function, Econometrica, Vol 24, 74-81.

Theil, H. (1957), A Note on Certainty Equivalence in Dynamic Planning. Econometrica. Vol25. 346-349.