GE (version 0.2.5)

gemTemporaryEquilibriumPath: Temporary Equilibrium Paths

Description

Some examples of temporary equilibrium paths with sticky decisions of a firm, that is, the firm adjusts its technology sluggishly when the prices change.

Let's make a simple distinction between market clearing paths, instantaneous equilibrium paths, and temporary equilibrium paths. Under the assumption of (complete) rationality, economic agents will make decisions that are most beneficial to them based on the information they have. If the information does not change, then the decision will not change. The market clearing path (with finite or infinite length) under the assumption of complete rationality is the instantaneous equilibrium path.

However, under the assumption of bounded rationality, the decisions made by economic agents may not be optimal. They may follow some simple rules-of-thumb and may just adjust the previous decisions sluggishly according to the changes in information even though they can adjust flexibly, so that the new decisions are better than the old ones under the new information. Hence the current decision is not necessarily the optimal decision. Even if the information does not change, it is still possible for agents to make further improvements to this decision in the next period. It can also be said that in this case, the decision maker's decision is sticky, that is, it only makes limited improvements to the previous decision based on new information, rather than directly adjusting to the optimal decision. A temporary equilibrium path is a market clearing path (with finite or infinite length) in which the economic agents can have complete rationality or bounded rationality. The instantaneous equilibrium path is a special case of the the temporary equilibrium path.

Usage

gemTemporaryEquilibriumPath(...)

Arguments

...

arguments to be passed to the function sdm2.

References

Grandmont, J.M. (1977). Temporary General Equilibrium Theory. Econometrica 45, 535-572.

See Also

policyMarketClearingPrice

Examples

# NOT RUN {
f <- function(stickiness.firm = 0) {
  dst.firm <- node_new("output",
    type = "Leontief", a = c(1 - stickiness.firm, stickiness.firm),
    "cc1", "cc2"
  )
  node_set(dst.firm, "cc1",
    type = "CD", alpha = 5,
    beta = c(0.5, 0.5),
    "prod", "lab"
  )
  node_set(dst.firm, "cc2",
    type = "CD", alpha = 5,
    beta = c(0.5, 0.5),
    "prod", "lab"
  )

  dst.consumer <- node_new("utility",
    type = "CD", alpha = 1,
    beta = c(0.5, 0.5),
    "prod", "lab"
  )

  ge <- sdm2(
    A = list(dst.firm, dst.consumer),
    B = diag(c(1, 0), 2, 2),
    S0Exg = {
      S0Exg <- matrix(NA, 2, 2)
      S0Exg[2, 2] <- 100
      S0Exg
    },
    names.commodity = c("prod", "lab"),
    names.agent = c("firm", "consumer"),
    numeraire = "lab",
    maxIteration = 1,
    numberOfPeriods = 20,
    policy = list(
      function(time, A, state) {
        if (time > 1) {
          node_set(A[[1]], "cc2",
            type = "Leontief", a = state$last.A[, 1]
          )
        }
      },
      policyMarketClearingPrice
    ),
    ts = TRUE
  )

  print(ge$p)
  print(ge$z)
  par(mfrow = c(1, 2))
  matplot(ge$ts.p, type = "l")
  matplot(ge$ts.z, type = "l")
}

f()
f(stickiness.firm = 0.8)

# }