Center for Economic Research, Department of Economics, University of Minnesota
This paper develops necessary conditions for a price adjustment mechanism to
achieve local stability at regular competitive equilibria. Two principal questions
are: how closely must a locally stable mechanism be tailored to particular excess
demand functions, and can any such mechanism be interpreted as a market adjustment
process. In response to the first question, a variant of the (local) Newton method,
termed the "orthogonal Newton method" is shown to require, in a dimensional sense,
the minimal information about excess demand functions. The second question is
answered in the negative by proving the nonexistence of any locally stable mechanism
with the property that the price of any given commodity is not changed when its own
market is in equilibrium. These and other results are obtained by using convergent
price paths to generate a homotopy between the adjustment dictated by the mechanism
and the actual direction of the equilibrium.
Jordan, J.S., (1982), "Locally Stable Price Mechanisms", Discussion Paper No. 171, Center for Economic Research, Department of Economics, University of Minnesota.
Locally Stable Price Mechanisms.
Center for Economic Research, Department of Economics, University of Minnesota.
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