Table Of ContentLecture Notes in Economics
and Mathematical Systems 475
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Leo Kaas
Dynamic
Macroeconomics
with Imperfect
Competition
Springer
Author
Dr. Leo Kaas
Institute for Advanccd Studies
Department of Economics
Stumpergasse 56
A-I06Q Vienna-Austria
Llbrary af Cangres$ Cataloglng-ln-Publlcat lan Data
Kaas. Lea. 1969-
Oyna~lc laeroecona.les wlth llperfect ceepetltlan I Leo Kaas.
p. c~. -- (Leeture notes In aeona.les and ~athelatlea systels
4751
Includes blbl10graphlcal referenees (p. l.
ISBN 978-3-540-66029-3 ISBN 978-3-642-56479-4 (eBook)
DOI 10..1007/978-3-642-58479-4
1. Coopetltton, Ieperfaet--Hltha~atleal eadels.
2_ Haeroeconolles--HathtllatlCal ~ode1s. 3. Equl11brlu. lEconOllcs)
-Hathelatlcal eodels. I. Tltle. II. Ser les.
HB238. K33 1999
338.6' 048--dc2 1 99-34450
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ISBN 978-3-540-66029-3
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To my parents
Preface
This thesis was stimulated throughout the time of my participation in a
research project on Dynamic Macroeconomics, supported by the German
Research Foundation (DFG). The starting point was the central question
of how to integrate price setting firms in a dynamic disequilibrium model.
Almost all recent literature on imperfect competition in macroeconomics
applies the objective demand approach by assuming that firms know the
true demand curve they are faced with. While this approach can be ap
plied in temporary monetary equilibrium models, it proves inadequate for
formulating price adjustment in a dynamic disequilibrium model, where
it has to be replaced by the concept of subjective demand. Based on this
distinction, the thesis starts out with a comparison of the concepts of
subjective and objective demand in an abstract framework and surveys
the literature on general equilibrium theory with imperfect competition.
The objective demand approach is criticized not only on the grounds
of its strong rationality requirements and existence problems, but also
by the observation that it cannot be applied successfully to characterize
determinate rational expectations equilibria in intertemporal macroeco
nomics. Finally, price setting firms using subjective demand functions
are integrated in a dynamic disequilibrium model in order to study mo
nopolistic and oligopolistic price adjustment.
In May 1998, this thesis was submitted as a dissertation at the Depart
ment of Economics of the University of Bielefeld. At this point, I would
like to thank both my supervisors, Prof. Volker B6hm and Prof. Thorsten
Hens, for many helpful discussions, stimulations and their criticisms
viii PREFACE
throughout all stages of research and completion. I am particularly grate
ful to Prof. Paul Madden, Prof. Neil Rankin, and Prof. Claus Weddepohl
for valuable comments on previous working paper versions. I am also very
grateful to Prof. Gerd Weinrich for helpful comments on this thesis. Parts
of the thesis have been presented at workshops and conferences in Berne,
Bielefeld, Oxford, Toulouse, and Vienna, whose participants I would like
to thank for their feedback. Finally, I thank my former colleagues Nicole
Deutscher, Eckart Jager, Jens-Ulrich Peter, and Dr. Matthias Raith for
their careful proof-reading and for useful remarks, and Uli Middelberg
for his indispensable computer support. Of course, all remaining errors
are my own.
Vienna, October 1998
Contents
1 Introduction 1
2 Subjective and objective equilibria 11
2.1 Introduction . . . . . 11
2.2 The basic framework 12
2.3 Perfect foresight and equilibrium concepts 16
2.4 Learning dynamics 21
2.5 Summary ..... 27
3 General equilibrium with imperfect competition 29
3.1 Introduction . . . . . . 29
3.2 Quantity competition. 32
3.2.1 The setup ... 32
3.2.2 Negishi equilibria 36
3.2.3 Cournot-Walras equilibria 38
3.2.4 Cournot-Walras equilibria without income
feedback .. 41
3.3 Price competition. 47
x CONTENTS
3.3.1 Some preliminaries . . . . . . . . . 47
3.3.2 Equilibria with Walrasian demand. 47
3.3.3 Equilibria with effective demand. 52
3.4 Summary ................ . 58
4 Intertemporal macroeconomic equilibrium 59
4.1 Introduction . . . . . . . . . . . . . . . . . 59
4.2 Temporary and intertemporal equilibrium 62
4.3 Indeterminacy of perfect foresight equilibria and involun-
tary unemployment . . . . . . . . . . . . . . . . . . . 66
4.3.1 Hart's model and involuntary unemployment. 66
4.3.2 The economy . . . . . . . . . . . . . . . . . 70
4.3.3 Indeterminacy of perfect foresight equilibria 74
4.3.4 A CES example . . . . . . . . . . . . . . . 79
4.4 Indeterminacy of rational expectations equilibria. 86
4.4.1 Are there unique rational forecasts? . . . 86
4.4.2 Characterization of rational expectations
equilibria ................ . 87
4.4.3 Example 1: Intertemporal Cournot-Walras
equilibria ................... 88
4.4.4 Example 2: A market game in an OLG exchange
economy. . . . . . . . . . . . . . . . . . . . . .. 96
4.5 Summary and discussion 101
CONTENTS xi
5 A dynamic macroeconomic model with price
setting firms 105
5.1 Introduction. 106
5.2 The economy 108
5.2.1 The agents. 109
5.2.2 The markets. 111
5.2.3 The dynamics 114
5.3 A parametric specification 115
5.3.1 Decision and expectation formation of firms 115
5.3.2 A reduced dynamical system. 121
5.4 Analysis of the dynamics ... 122
5.4.1 The monopolistic case 122
5.4.2 The oligopolistic case . 126
5.5 Summary and discussion ... 136
6 Final remarks 139
List of Figures 143
List of Abbreviations 145
Bibliography 147
