A DISEQUILIBRIUM MACRO MODEL AND CATASTROPHE THEORY: THE CASE OF AN OIL SHOCK
Abstract
This study builds a simple disequilibrium macromodel of a small open economy that imports oil from an exogenous unit. The model is motivated by very slow adjustment of prices and wages to disequilibrium. Output on the other hand adjusts to its final level instantaneously. We specify a rationing scheme that explicitly takes into account the spillover effects and differentiates between notional, effective, and actual quantities. In a Solow-Stiglitz (1968) setting we develop a dynamic model in which the dynamic forces depend on the economic environment specified by the Malinvandian regimes: Classical Unemployment, Keynesian Unemployment, Repressed Inflation and the Walrasian Equilibrium. Given that dynamic system we seek to identify the stationary points of the system (quasi-equilibria) and to find their stability properties. To the disequilibrium model an oil shock is introduced and its effects on employment, real output, real wage and the stationary points of the system are investigated. We consider a one time increase (decrease) in the real price of oil and a continuous increase (decrease) in the real price of oil. We investigate the path the economy takes and in particular the continuous and discontinuous behavior of the quasi-equilibria. Finally we incorporate into the model government policy and investigate different policy alternatives.
Degree
Ph.D.
Subject Area
Economic theory
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