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Nonclearing Markets: Microeconomic Concepts and Macroeconomic Applications Author(S): Jean-Pascal Bénassy Source: Journal of Economic Literature, Vol

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Nonclearing Markets: Microeconomic Concepts and Macroeconomic Applications Author(S): Jean-Pascal Bénassy Source: Journal of Economic Literature, Vol American Economic Association Nonclearing Markets: Microeconomic Concepts and Macroeconomic Applications Author(s): Jean-Pascal Bénassy Source: Journal of Economic Literature, Vol. 31, No. 2 (Jun., 1993), pp. 732-761 Published by: American Economic Association Stable URL: http://www.jstor.org/stable/2728514 . Accessed: 11/06/2011 18:49 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. 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American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to Journal of Economic Literature. http://www.jstor.org Journal of Economic Literature Vol. XXXI (June 1993), pp. 732-761 Nonclearing Markets: Microeconomic Concepts and Macroeconomic Applications By JEAN-PASCAL BE'NASSY CNRS and CEPREMAP,Paris I want to thank the anonymous referees for the numerous improve- ments they brought to this article. All remaining deficiencies are my sole responsibility. I. Introduction equilibriumin its modern reformulation (Leon Walras 1874; Kenneth Arrow and THE LAST TWENTY YEARS havewitnessed Gerard Debreu 1954; Debreu 1959). Im- the development of a new body of perfect competition, on the other hand, theory, in both micro and macroeconom- was dealt with in a "Marshallian"partial ics, aimed at generalizing traditional equilibrium framework,1 in line with the Walrasian theory to cases where not all pioneering works of Augustin Cournot markets clear. This generalization was (1838) and Edward Chamberlin (1933). achieved through a synthesis of three im- As for macroeconomics, it had been portant paradigms: Walrasian, Keynes- for many years dominated by the ian, and imperfect competition. The pur- Keynesian paradigm, particularly in its pose of this article is to give a simple IS-LM version (John Maynard Keynes and self-contained account of these de- 1936; John Hicks 1937). It was then clear velopments for both micro and macro- to most economists that the Keynesian economists. model had no microfoundations and that its long existence was due to the fact that, A. Early Motivations and Scope unlike the Walrasian model, it could deal explicitly with such important problems An early and continuing motivation as involuntary employment and the asso- for this theory was the desire to give seri- ciated policy problems. ous microeconomic foundations to mac- A number of authors tried to bridge roeconomics. When this research pro- the gap between microeconomics and gram started there was indeed a profound Keynesian macroeconomics: The stimu- split between the two. The microeconomics of perfect compe- tition was built from rigorous principles 1 With of course one importantexception, Takashi in a general Negishi's (1961) formalizationof imperfect competi- equilibrium framework, and tion with subjective demand curves in a general equi- culminated in the notion of Walrasian librium framework. 732 Benassy: Nonclearing Markets 733 lating contributions by Don Patinkin to quantity signals as well as to price sig- (1956), Robert Clower (1965), and Axel nals, and secondly by endogenizing Leijonhufvud (1968) made clear that the prices in a way that resulted from explicit Keynesian paradigm could make sense maximization by private agents. The re- only in a world where agents were quan- sulting concepts enable us to treat price tity constrained (for example the involun- formation schemes ranging from full ri- tarily unemployed in labor markets) and gidity to full flexibility, including a thor- where quantity adjustments would partly ough treatment of imperfect competi- replace price adjustments (as in the vari- tion. Moreover each market may have ous versions of the Keynesian multi- its own specific price determination plier). In a well-known article, Robert scheme, which allows the model builder Barro and Herschel Grossman (1971) great flexibility, as we shall see especially constructed an aggregated fixprice model in the macroeconomic applications of giving some choice theoretic foundations Part IV. to the basic Keynesian model, and point- Generalizing the Walrasian model to ing out the existence of other regimes cases where markets do not clear was not as well. At that stage, however, both a the only avenue to reconcile micro and full general equilibrium formulation of macroeconomics. In the early 1970s a the Arrow-Debreu type, and a descrip- new macroeconomic school, the "new tion of rational price formation in various classical" school, took the opposite route markets were obviously missing. by rejecting both Keynesianism and im- The goal of the research program de- perfect competition, and constructing scribed in this article was to fill these macroeconomic models based on the as- gaps and produce a framework of analysis sumption of full market clearing at all which would encompass simultaneously times. This school met with quite a large the three lines of work described above success, due to the fact that it combined by using their most interesting insights. the market clearing hypothesis with a From the Walrasian paradigm it retained very popular assumption, the "rational the full general equilibrium setting; from expectations hypothesis" (John Muth the Keynesian one the possibility of non- 1961). It has become clear, however, that clearing markets, quantity signals, and the distinguishing feature of new classical partial quantity adjustments; and from macroeconomics is not so much the ra- the imperfect competition paradigm the tional expectations hypothesis as the explicit formalization of price making by Walrasian market clearing one. As this agents internal to the system.2 More spe- will be the main focus of this article, we cifically the synthesis between these are now naturally led to examine why three lines of thought was achieved we want to have a general theory of non- through a generalization of Walrasian clearing markets. theory, first by allowing agents to react B. Why Study Nonclearing Markets 2 Though this endogenous price setting aspect will be obvious in what follows, it may be useful to dispel We begin our argument with the sim- at this early stage a widespread misconceptionof the ple observation that on only a fraction domain, in which this reduces solely to the treatment of completely fixed prices. Althoughthe first models of real world markets, such as the stock endogenizing prices in such a frameworkappeared market which inspired Walras, is the in the mid-seventies (Benassy 1976, 1978), this mis- equality between demand and supply en- representationpersists in some circles. Two recent examples are Olivier Blanchardand, Stanley Fischer sured institutionally by an actual auc- (1989) and Gregory Mankiw(1990). tioneer. For all other markets where no 734 Journal of Economic Literature, Vol. XXXI (June 1993) auctioneer is present, there is, as Arrow C. The Necessity of a General (1959) himself perceptively noted Equilibrium Approach a logical gap in the usual formulationsof the One might agree with the preceding theory of the perfectly competitive economy, arguments, but still be satisfied with a namely that there is no place for a rationaldeci- partial equilibrium approach to nonclear- sion with respect to prices as there is with re- ing markets. In this case market imbal- spect to quantities. (p. 41) ances would be studied at the level of each single market, while the Walrasian Although quantity actions by all agents structure would be kept for general equi- result from rational maximizing behavior, librium and macroeconomics, the basic market clearing is assumed axiomati- idea being that, as far as policy is con- cally. cerned, demand-supply imbalances can As we demonstrate below, our method be dealt with on a market by market ba- allows us to build a consistent theory of sis. We shall show here that, at least from price (and quantity) determination on a general equilibrium and macroeco- markets without an auctioneer, mainly nomic point of view, this is not a sound because it enables us to derive the poten- position. Indeed one of the main insights tial quantity consequences of any price of the models we shall study is the impor- choices, whereas Walrasiantheory allows tance of "spillover effects" through which such a description of quantity conse- disequilibrium in one market can actually quences for the Walrasian equilibrium be provoked by causes originating in an- prices only. Furthermore, the explicit other market. We shall illustrate this by in the determina- use of quantity signals a simple example where, in spite of a tion of demands, supplies, and prices by fully flexible
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