Price expectations in neo-Walrasian equilibrium models: an overview

Fratini, Saverio M. and Levrero, Enrico Sergio and Ravagnani, Fabio (2016): Price expectations in neo-Walrasian equilibrium models: an overview.

Abstract

Since the late 1960s, research in the field of general equilibrium theory has focused on economies in which spot markets for commodities coexist with some asset markets and trade takes place sequentially over time. The study of ‘sequential economies’ has developed along two paths inspired by Hicks’s Value and Capital, which stress the dependence of agents’ choices on their expectations of future prices. The first is temporary equilibrium theory, in which expectations are subjective. The second postulates that all agents exactly predict the future prices (sequential economies with perfect foresight). This paper points out that the inclusion of expectations among the determinants of equilibrium originates considerable analytical problems within each of the mentioned approaches derived from Value and Capital. On the basis of the studies of the 1970s and 1980s, it first illustrates the difficulties that arise in temporary equilibrium theory due to the subjective nature of individual forecasts. Then it moves on to examine sequential economies with perfect foresight. After illustrating the equilibrium notion on which the analysis of those economies relies, i.e. the ‘equilibrium of plans, prices and price expectations’ introduced by Radner (1972), it argues, in the light of recent contributions, that for plausible configurations of the economy the perfect foresight associated with Radner equilibria proves not only unrealistic but also theoretically dubious.

• Item Type: MPRA Paper
• Language: English
• Keywords: expectations; temporary equilibrium; Radner equilibrium
• Subjects: B - History of Economic Thought, Methodology, and Heterodox Approaches > B2 - History of Economic Thought since 1925 > B21 - Microeconomics; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D46 - Value Theory; D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D51 - Exchange and Production Economies; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations ; Speculations

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