Econometrica: Jan 1975, Volume 43, Issue 1
Tatonnement Stability of Infinite Horizon Models with Saddle-Point Instability
Walter Perrin HellerConsider a competitive economy with infinite horizon Ramsey behavior by households, present-value maximizing firms and infinitely many futures markets. If prices adjust according to excess demands, then the economy is locally stable. This is in marked contrast to the saddle-point instability exhibited by the myopic foresight dynamics in models of this genre. It is argued that infinite futures markets are idealizations of actual economic forces.
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