Aggregate Excess Demand Research Articles

The Buckingham’s π Theorem: Consequences for the Price Theory

The present article focuses on the possible interpretation of the pi theorem of physics in the field of the economics' general equilibrium analysis. The physical units of the exchanged goods are de ned as fundamental units and the neoclassical prices as dimensionless derived numbers. Thus, the general equilibrium does not need money metrics, unspeci ed money market and the complementing inappropriate incorporation of the Walras Law. Further, the main function of money is not that of a unit of account, but a means of exchange. If such type of a money market is introduced, the Walras symmetry holds but in the sense that the positive aggregate excess demand on the goods market matches the negative excess demand on the money market. Distinction is de ned between neoclassical, relative and monetary prices. Additional conditions must be met to allow for a closed monetary circulation.

Aggregate excess demand on wall street

The rational investor behavior and news triggered price change assumed by the Efficient Market Hypothesis (EMH) could not explain most of asset price variances, suggesting the need for an alternative theory. The Behavioral Finance Theory (BFT) advocates those economic judgments and decisions in markets are often irrational because of systematic and predictable psychological bias. However, due to the lack of measurable investment behaviors, proponents of the efficient market hypothesis argue that irrational behavior could not be reliably identified and predicted. Here we show that the price-takers behavior gauged by the normalized excess demand (NED) can be measured and the results explain most of the variances of SP500 daily returns over eight years of available data, the remaining variances are due to price-makers behavior, an influence abstracted out by the Walrasian general equilibrium theory. The interactions between behaviors of price-takers and price-makers drive market price fluctuations. For short-term prediction, we demonstrate that detected market makers' inventory positions often lead to intraday and daily market reversals. For long-term forecasting, feedback analyses of NED and SP500 data reveal signals of looming plunges and recovery processes in 2000, 2008, and 2020 market crises.

A cut above the rest? Private anthropometrics in marriage markets

A large body of economic research suggests that publicly observable anthropometric characteristics affect labor and marriage market outcomes. Private anthropometrics may not affect these outcomes. We examine male circumcision in marriage markets in Zambia. Our analysis reveals substantial variation across local marriage markets in circumcision prevalence relative to preference for circumcised partners, as well as excess aggregate demand for circumcised males. Regression estimates suggest a marriage market premium of approximately one-half to one year of additional schooling for matching with a partner of preferred anthropometric type in a local marriage market with excess demand for that anthropometric characteristic.

Knut Wicksell on Utility and Market Aggregation

Knut Wicksell discussed in his 1893 Value, Capital, and Rent, as part of a critical comment on Launhardt and Jevons, conditions for consistent aggregation. He argued that Jevons's “trading body” concept was only valid if identical linear marginal utility functions (with ensuing parallel Engel lines for all individuals) could be assumed, which he regarded as unrealistic. Wicksell preferred Léon Walras's notion of market excess aggregate demand functions, which are functions of prices only. Such functions would not be affected by aggregation problems, if only disequilibrium transactions were assumed away. The article also addresses Wicksell's position concerning the so-called Cournot problem (that the general equilibrium system may not be able to provide precise numerical solutions), and his use of the notion of the representative agent in the formulation of the saving function.

The Baffling New Inflation: How Cost-Push Inflation Theories Influenced Policy Debate in the Late-1950s United States

This essay examines how cost-push inflation theories, which highlight autonomous increases in wages and other production costs as a cause of inflation, played a decisive role in the policy debate over the interpretation of the price movements of the second half of the 1950s. In late 1956, economic experts, including politicians and journalists as well as economists, began to observe a peculiarity accompanying the ongoing inflation, namely, an apparent lack of excess aggregate demand, and they placed great emphasis on cost-push inflation theories in their interpretations of this peculiar phenomenon. When the recession of 1958 was accompanied by a steady increase in general prices, some experts took this as further supporting evidence for cost-push inflation. Against the background of this atypical inflation, the US Congress, then ruled by the opposition Democratic Party, initiated a large-scale inquiry into the nature and causes of inflation. These investigations produced one report in particular that emphasized cost-push theories. This essay as a whole shows how the controversy over the inflation of the late 1950s created a general perception that inflation can be at least partly controlled by measures that address cost increases in the private sector, and we suggest that this perception sowed the seeds of the Great Inflation later.

Wicksell on Utility and Market Aggregation

Wicksell discussed in his 1893 book Value, capital and rent, as part of a critical comment on Launhardt and Jevons, conditions for consistent aggregation. He argued that Jevons’s trading body concept was only valid if identical linear marginal utility functions (with ensuing parallel Engel lines for all individuals) could be assumed in general, which he regarded as unrealistic. Wicksell preferred Walras’s notion of market excess aggregate demand functions, which are function of prices only. Such functions would not be affected by aggregation problems, if only disequilibrium transactions were assumed away. The paper also addresses Wicksell’s position concerning the so-called “Cournot problem” that the general equilibrium system may not be able to provide precise numerical answers because of computation and information problems. Finally, Wicksell's notion of the representative agent in his discussion of the savings function, and its compatibility with his criticism of the trading body concept, is considered.

An Algebraic Proof of the Existence of a Competitive Equilibrium in Exchange Economies

The standard excess demand argument for existence of competitive equilibria in exchange economies invokes maximizing the market value of the aggregate excess demand function and thereby adjusting the prices toward equilibrium. By exploiting the Perron-Frobenius theorem on stochastic matrices, we offer an algebraic proof of the existence of a competitive equilibrium without resorting to such a device of excess demand.

PRICE DYNAMICS IN GENERAL EQUILIBRIUM EXPERIMENTS

AbstractGeneral equilibrium (GE) theory faces several related challenges. Classical theories of out‐of‐equilibrium adjustment are intuitive but implausibly centralized. Further, standard restrictions on individual preferences place little structure on aggregate excess demand functions. Amongst other issues, this fact implies that economies can be unstable under classical dynamics, and thus instability appears to be an unavoidable feature of GE theory. This paper recounts laboratory studies of GE environments which reveal that classical theories of dynamics do, in fact, organize market activity surprisingly well. These experiments suggest that the Walrasian auctioneer, for example, appears to be a constructive abstraction, and that instability should be accommodated within theory rather than circumscribed. Laboratory applications of GE theory focused on issues beyond stability and dynamics are also briefly surveyed.

Material needs and aggregate demand

A central conclusion of the standard theory of consumption is that consumers’ preferences can be taken as theoretical primitives. Special categories of consumption, such as “basic needs”, or of goods, such as “subsistence goods” are seen as extra theoretical baggage that add few, if any, insights. This theoretical orientation has been absorbed into the theory of aggregate demand, but the aggregate theory has a serious problem that is not shared by the individual-level theory: no matter how well-behaved the individual-level demand functions may be, the aggregate-level function can take on almost any form. This result follows from the SMD theorem, named after Sonnenschein, Mantel, and Debreu, who developed the theory; Kirman and Koch strengthened the results, and the SMD–KK theorem poses a fundamental challenge to models linking micro and macroeconomics. A standard response to the aggregation problem is to introduce a representative agent, but this merely sidesteps the problem. We argue that the aggregation problem arises, in part, because of the exclusion of needs from the theory. Specifically, we argue that material needs—such as basic needs for energy, water, food, and shelter—must be included as theoretical primitives because both the needs and the satisfiers of those needs are universal. We construct a microeconomic model with material needs and show that the form of the aggregate excess demand function is not completely arbitrary, so the SMD–KK theorem does not apply. We discuss the implications of this result.

Quasi-variational analysis of a dynamic Walrasian competitive exchange economy

In this paper we propose a new definition of competitive equilibrium for an exchange economy model over time. At each moment consumer is characterized by an initial endowment and by an utility function, which he adopts for choosing the better consumption that he can afford. The actions, the constrain budget and the preferences described by utility functions depend on the price vector, time and the instantaneous commodity holding. With reference to a finite continuous time period, assuming that in this marketplace the mean value of the aggregate excess demand is non-positive and measuring its principal activities only in terms of mean values, we treat this setting as a pure exchange economy and for it we give an existence result of such equilibria by means of variational methods.

WHAT A DIFFERENCE A SUM (∑) MAKES: SUCCESS AND FAILURE IN THE RATIONALIZATION OF DEMAND

This paper discusses the Sonnenschein–Mantel–Debreu (SMD) theorems in general equilibrium theory. It argues that the SMD results were related to the previous literature on the integrability of demand. The integrability question involved rationalizing individual demand functions, and the SMD theorems asked the same question about aggregate (market) excess demand functions. The paper’s two goals are to demonstrate how the SMD results followed naturally from the earlier work on integrability, and to point out that the profession’s reception was quite different; the integrability results were considered a success story, while the SMD results were quite negative.

What a Difference a Sum Makes: Agony and Ecstasy in the Rationalization of Demand

Most historical discussions of Arrow-Debreu general equilibrium theory discuss the negative impact of the so-called Sonnenschein-Mantel-Debreu (SMD) results on aggregate excess demand functions. This paper argues that the SMD results were a natural extension of the integrability literature of the period 1959-71 - something that has not been recognized in the historical literature - and considers some of the implications of this for the history of modern economic thought.

Direct perturbations of aggregate excess demand

We complement the Sonnenschein–Mantel–Debreu results by establishing that an exchange economy, i.e., preferences and endowments, that generates a given aggregate excess demand (AED) function is close to the economy that generates a perturbation of this AED. As a consequence, genericity and determinacy results obtained by direct perturbation of an AED are as strong as results obtained by perturbing preferences and endowments.

Excess demand function around critical prices in incomplete markets

We show that the aggregate excess demand function in an economy with incomplete real asset markets can be characterized by Walras’ law, homogeneity, and continuity around critical prices that cause one-dimensional drop of the dimension of the budget set.

The Rise and Fall of Walrasian Microeconomics: The Keynesian Effect

Two common claims about mid-to-late twentieth century economics are that Walrasian ideas had an influence on the particular version of Keynesian macroeconomics that became dominant during the 1950s and 1960s, and that Walrasian general equilibrium theory passed its zenith in microeconomics at some point during the 1980s. This paper does not challenge either of these standard interpretations of the history of modern economics. What the paper argues is that there are at least two very important relationships between Keynesian economics and Walrasian microeconomic theory that have not generally been recognized within the literature. The first is that influence ran not only from Walrasian theory to Keynesian, but also from Keynesian theory to Walrasian. It was during the neoclassical synthesis that Walrasian economics emerged as the dominant form of microeconomics and I argue that its compatibility with Keynesian ideas influenced certain aspects of its theoretical content and also contributed to its success. The second claim is that not only did Keynesian economics contribute to the rise of Walrasian general equilibrium theory, it has also contributed to its decline during the last few decades. The features of Walrasian theory that are often suggested as its main failures – stability analysis and the Sonnenschein-Mantel-Debreu theorems on aggregate excess demand functions – can be traced directly to the features of the Walrasian model that connected it so neatly to Keynesian macroeconomics during the 1950s and 1960s.

Inflation in developing Asia

Inflation emerged as the single biggest macroeconomic challenge confronting developing Asia during 2007–2008, although inflationary pressures have abated since the second half of 2008 due to the global crisis. This paper empirically examines the relative importance of different sources of inflation in developing Asia. In particular, it tests the widely held view that the region's inflationary surge during 2007–2008 was primarily the result of external price factors such as oil and food shocks. Our central empirical result is that, contrary to popular misconception, Asia's inflation is largely homegrown and has arisen due to excess aggregate demand and inflationary expectations, rather than external price shocks. This suggests monetary policy will remain a powerful tool in fighting inflation in Asia, as well as in defusing the risks of deflation.

Excess demand functions when new assets are introduced

We demonstrate that information on the aggregate excess demand function of an incomplete real asset market economy is not helpful toward predicting the equilibrium of a new economy to which unredundant assets are added. An innovation of assets can completely change the aggregate excess demand functions.

Thom-Boardman Stratification of Aggregate Excess Demand and Finiteness of Equilibria

The paper establishes that the Thom-Boardman stratification result of singularity theory applies generically to the world of aggregate excess demand (AED) functions. In addition, if AED is analytic, then the number of Walrasian equilibria - including non-regular ones - is finite.

Direct Perturbations of Aggregate Excess Demand

We complement the Sonnenschein-Mantel-Debreu results by establishing that an exchange economy, i.e., preferences and endowments, that generates a given aggregate excess demand (AED) function is close to the economy that generates a perturbation of this AED. As a consequence, genericity and determinacy results obtained by direct perturbation of an AED are as strong as results obtained by perturbing preferences and endowments.

Stabilizing Consumer Choice: The Role of 'True Dynamic' Stability and Related Concepts in the History of Consumer Choice Theory

It is often argued that the inability of Arrow-Debreu general theory to produce an adequate proof of the of the Walrasian price adjustment mechanism was one of the program's most significant failures (a failure that is directly related to the infamous Sonnenschein-Mantel-Debreu results on aggregate excess demand functions). This paper will not question this standard interpretation of the history of general theory, but makes the case that characterizing the stability question in terms of market - in particular the of the price vector in Walrasian general model - actually helped to stabilize the standard model of consumer choice in general theory and elsewhere within microeconomics. The problem of the of consumer's equilibrium was much discussed early in the twentieth century and it has recently re-emerged in a different guise as the endowment effects and path dependencies of contemporary experimental and behavioral economics, and yet it disappeared from mainstream discussion during the period 1950-1980. This paper argues that shifting the discussion from the intra-agent of the individual consumer to the inter-agent of the competitive market contributed - despite its ultimately negative impact on general theory - to the long period of stable normal science consumer choice theory enjoyed during the middle of the 20th century. The paper ends by considering some of the implications of this interpretation of the history of the literature.