General Equilibrium Theory with Market Frictions. Part I. Quantity Equilibrium with Rational Expectations.
HARVARD UNIV CAMBRIDGE MA CENTER ON DECISION AND CONFLICT IN COMPLEX ORGANIZATIONS
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This paper demonstrates the existence of a rational expectations, quantity equilibrium in a general equilibrium model of an economy with market fritions. A market is said to have frictions if buyers and sellers have trouble finding each other, if it is costly for them to search for each other, and if it is costly to wait to buy or sell. Equilibrium is a stationary probability distribution over the set of possible time paths of states of the economy. This equilibrium reflects rational expectations if all agents know the stationary distribution of the variables they observe and if they exploit this information. Prices are fixed and are not necessarily equilibrium prices in any sense. Author
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