A Disequilibrium Rational Expectations Model with Walrasian Prices and Involuntary Unemployment

Abstract

A fixprice, non-Walrasian temporary equilibrium which co-exists with the Walrasian equilibrium at Walrasian temporary equilibrium prices, has been called “unsatisfactory” by Hahn. If consumers live, and work, for two periods, expectations of future unemployment easily (in particular with normal goods) generate unsatisfactory Keynesian unemployment equilibria, if these expectations reflect serial correlation in unemployment. Assuming that the choice of temporary equilibrium (Walrasian or Keynesian) is governed by an extraneous, “serially correlated” random variable (sunspots), a long-run equilibrium of an overlapping-generations model is presented which has persistent Walrasian prices, rational expectations and intermittent phases of Keynesian unemployment and Walrasian full employment.