Stability of tâtonnement processes of short period equilibria with rational expectations

Abstract

In this paper we propose a new tâtonnement process of short-period equilibria with rational expectations: current period prices move proportionally to current period excess demand while future prices are formed according to the perfect foresight hypothesis. It is shown that this process is locally asymptotically stable if all goods are gross substitutes, or if the equilibrium has no trade. In general this process differs from a tâtonnement process in contingent contracts prices and from a tâtonnement in asset and spot market prices. It also differs from Hicks' and exceptional stability. In an intertemporal variant of Scarf's example on the instability of the Walrasian tâtonnement process it will be seen that the tâtonnement process we propose is more stable than any other process investigated so far.