Endogenous Trading Uncertainty and Macroeconomic Equilibrium

This paper explores the analogy between equilibrium under flexible prices and equilibrium under fixed prices in a large decentralised economy characterised by trading uncertainty. To price dispersion in the former there corressponds 'quantity dispersion' in the latter. Specifically, we show that if fixed prices are posited and proposed trades are rationed according to a stochastic rationing mechanism different disequilibrium regimes can coexist in different parts of the system. Such a coexistence has equilibrium properties in the sense that agents (consumers and firms) are indifferent between facing different stylised disequilibrium regimes. The plan of the paper is as follows. Section I discusses the concept of stochastic rationing we employ in conjunction with fixed-price equilibrium theory. Section II introduces the model and indicates how it may be applied to study price dispersion in flexible price equilibrium. Section III presents the main result about the coexistence of the stochastic Keynesian regime and the stochastic suppressed inflation regime and discusses its implications for macroeconomic policy.