THE TRANSITION FROM A DREZE EQUILIBRIUM TO A WALRASIAN EQUILIBRIUM

In this paper a price and quantity adjustment process in continuous ti me is considered for an economy facing price rigidities. In the short run prices are assumed to be completely fixed and the markets are clea red by quantity adjustments until a fixed price equilibrium is reached where every market is typically characterized by either supply ration ing or demand rationing. Using only standard assumptions on the primit ive concepts of the economy and a non-degeneracy condition, it is show n that the process indeed converges to a fixed price equilibrium for t he initially given prices in the short run. In the long run prices are assumed to move upwards in the case of demand rationing on a market a nd downwards when supply rationing occurs, while markets are kept in e quilibrium by infinitesimal quantity adjustments. Again, under standar d assumptions on the primitive concepts of the economy and a non-degen eracy condition, the process is shown to reach a Walrasian equilibrium in the long run. A simplicial algorithm has been developed to make th e study of the price and quantity adjustment process possible and the accuracy of this algorithm is discussed. (C) 1998 Elsevier Science S.A .