EQUILIBRIUM ADJUSTMENT OF DISEQUILIBRIUM PRICES

We consider an exchange economy in which price rigidities are present. An always converging price and quantity adjustment process for such a n economy is presented that is based on a discrete algorithmic procedu re rather than on more traditional adjustment processes, which are bas ed on difference or differential equations. In the short run, all non- numeraire commodities have a flexible price level with respect to the numeraire commodity but their relative prices are mutually fixed. In t he long run, prices are assumed to be completely flexible. The adjustm ent process starts with a trivial equilibrium with a low enough price level and complete demand rationing on all markets. Along the path fol lowed by the adjustment process, initially all relative prices of the non-numeraire commodities are kept fixed and the price level is increa sed. Rationing schemes are adjusted to keep markets in equilibrium. In doing so, the process reaches a short-run equilibrium with only deman d rationing and no rationing on the numeraire and at least one of the other commodities. In the long run, the process allows for a downward price adjustment of unrationed non-numeraire commodities and eventuall y reaches a Walrasian equilibrium.