General equilibrium and the new neoclassical synthesis

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Abstract

We present a general equilibrium model of the new neoclassical synthesis that has the same level of generality as the Arrow-Debreu model. This involves a stochastic multi-period economy with a monetary sector and sticky commodity prices. We formulate the notion of a sticky price equilibrium where all agents form rational expectations on prices for commodities and assets, interest rates, and rationing. We present a general result showing that monetary policy imposes no restrictions whatsoever on nominal equilibrium price levels and that the set of sticky price equilibria has a dimension equal to the number of terminal date-events. Stickiness of prices implies that this indeterminacy is real.
Original languageEnglish
Pages (from-to)437-477
Number of pages41
JournalEconomic Theory
Volume57
Issue number3
DOIs
Publication statusPublished - Nov 2014

Keywords

  • General equilibrium
  • Monetary policy
  • Sticky prices
  • New neoclassical synthesis
  • Indeterminacy
  • MONOPOLISTIC COMPETITION
  • TRANSACTIONS DEMAND
  • MONETARY-POLICY
  • TAYLOR RULES
  • PRICES
  • MONEY
  • CASH
  • EXPECTATIONS
  • INFLATION

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