General Equilibrium With Nonconvexities, Sunspots, and Money

50 Pages Posted: 31 Oct 2007

See all articles by Guillaume Rocheteau

Guillaume Rocheteau

Federal Reserve Bank of Cleveland; National University of Singapore (NUS)

Peter Rupert

University of California, Santa Barbara (UCSB) - Department of Economics

Karl Shell

Cornell University - Department of Economics

Randall Wright

University of Wisconsin - Madison - Department of Finance, Investment and Banking; Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Date Written: December 2005

Abstract

We study general equilibrium with nonconvexities. In these economies there exist sunspot equilibria without the usual assumptions needed in convex economies, and they have good welfare properties. Moreover, in these equilibria, agents act as if they have quasi-linear utility. Hence wealth effects vanish. We use this to construct a new model of monetary exchange. As in Lagos-Wright, trade occurs in both centralized and decentralized markets, but while that model requires quasilinearity, we have general preferences. Given our specification looks much like the textbook Arrow-Debreu model, we think this constitutes progress on the classic problem of integrating money and general equilibrium theory. We also use the model to discuss another classic issue: the relation between inflation and unemployment.

Suggested Citation

Rocheteau, Guillaume and Rupert, Peter and Shell, Karl and Wright, Randall D., General Equilibrium With Nonconvexities, Sunspots, and Money (December 2005). FRB of Cleveland Working Paper No. 05-13, Available at SSRN: https://ssrn.com/abstract=1025475 or http://dx.doi.org/10.2139/ssrn.1025475

Guillaume Rocheteau (Contact Author)

Federal Reserve Bank of Cleveland ( email )

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Peter Rupert

University of California, Santa Barbara (UCSB) - Department of Economics ( email )

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Karl Shell

Cornell University - Department of Economics ( email )

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Randall D. Wright

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

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Federal Reserve Banks - Federal Reserve Bank of Minneapolis

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