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March 1980 - Volume 48 Issue 2 Page 283 - 306


Recent Developments in Macroeconomic Disequilibrium Theory

Allan Drazen


Recent papers which use the framework of temporary equilibrium with rationing to explain unemployment phenomena (sometimes termed "disequilibrium" theory, in which prices do not clear spot markets) are surveyed and evaluated critically. Models which posit fixed prices and then explore the effects of price rigidity are studied. I then consider attempts to explain why prices don't clear markets by considering models in which prices and quantity constraints are simultaneously determined. Many such models are based on perceived demand curves, leading one to consider the viability of unemployment equilibria under various restrictions about correctness or rationality of perceptions. I also consider in detail the role of a medium of exchange and assets in general and show that it is incorrect to link liquidity constraints and quantity rationing.

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