Asset Prices and Temporary Equilibrium with Rationing

Abstract

The disequilibrium approach to modern macroeconomics, see for instance Barro & Grossman (1972) and Malinvaud (1977), has provided a much better understanding of different types of unemployment situations. Yet, at the market level, it has been a one-period analysis involving the wrong spot money wage and product price only.' On one hand, most of this literature has been presented as a reconsideration of Keynesian economics; on the other hand, Leijonhufvud (1968) has convincingly argued that a key to the understanding of typically Keynesian unemployment situations resides in the recognition that in an economy where the present is greatly affected by the perception of the future (as it relates in particular to the uncertain return on capital), it is the general level of asset prices which may often be wrong while the current money wage and product price are right. The object of this short paper is to make precise Leijonhufvud's contention by considering the sequence of temporary equilibria where the correct spot money price vector-which now includes an asset price and hence interest rate-is associated with a steady-state Walrasian equilibrium. Short-run equilibrium or disequilibrium prices are then judged with respect to this correct spot money price vector. This procedure permits an extention of the taxonomy of unemployment situations proposed by Barro and Grossman and Malinvaud, to include Leijonhufvud's case.