Springer Nature is making SARS-CoV-2 and COVID-19 research free. View research | View latest news | Sign up for updates

Financial Markets and the Instability of General Equilibrium

  • 59 Accesses

  • 1 Citations

Abstract

The Hicksian general equilibrium with money and securities is the starting point for an expansion with numerous other financial variables. Disturbances to the system, partly observed from recent experience, are examined, and possible remedies are proposed. Walras’ Law, that the sum of excess demands for goods and basic factors is zero, no longer applies in an economy where financial variables are present. The main analysis is of a closed economy; the open economy, in the manner introduced by Mosak, is treated in an appendix.

This is a preview of subscription content, log in to check access.

References

  1. Grandmont, J. M. (1983). Money and value, a reconsideration of classical and neoclassical monetary theories. Cambridge University Press.

  2. Gurley, J. G., & Shaw, E. S. (1956). Money in a theory of finance. Washington: Brookings.

  3. Hicks, J. R. (1946). Value and capital. Oxford: Clarendon.

  4. Keynes, J. M. (1935). The general theory of employment, interest, and money. New York: Harcourt, Brace, and Co.

  5. Morishima, M. (1977). Walras’ economics, a pure theory of capital and money. Cambridge University Press.

  6. Mosak, J. L. (1947). General equilibrium theory in international trade. Bloomington: Principia.

  7. Sargent, T. J. (1987). Macroeconomic theory (2nd ed.) Academic Press.

  8. Sargent, T. J. (2008). Evolution and intelligent design. The American Economic Review, 98(1), 5–37.

Download references

Author information

Correspondence to Franz Gehrels.

Appendix

Appendix

The treatment of disturbances and remedies above was restricted to the closed economy. Opening the economy in the manner of Mosak(1947) adds to the complexity by the addition of foreign excess demands and supplies. Stating these again in vector form, we write

$$ {\text{E}} = 0\,{\text{or E}} \ne 0 $$
(9)

Restricting this only to goods and final services, in full equilibrium the positive or negative components of E would match the negative or positive unequal components of (1) above. This is compatible with a negative or positive balance of trade. And this in turn may match the flow of capital in one or the other direction. Disturbances in trade may come through activity fluctuations abroad, structural shifts, trade interferences, exchange-rate changes, different rates of price-level change, or technological innovation. Consequently, the nonzero components of E above may in disequilibrium not match the opposite nonzero components of the equations (1) above.

Not receiving explicit treatment from Mosak is the capital account, including fund transfers of short-term or long-term duration. Funds may move between financial centers independently of trade or investment considerations and be the source of reverberations in the domestic financial structure. Conversely, foreign markets are affected by disturbances on the home market. Add these international aspects to several sources of disequilibrium, and Walras’ Law is left as a useful analytical starting point, but not as a statement of market adjustments to disturbances in the world as we know it.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Gehrels, F. Financial Markets and the Instability of General Equilibrium. Atl Econ J 37, 327 (2009). https://doi.org/10.1007/s11293-009-9191-9

Download citation

Keywords

  • General equilibrium
  • Financial markets
  • Disturbances

JEL

  • E12
  • E13
  • G10