Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/300472 
Authors: 
Year of Publication: 
2024
Series/Report no.: 
Staff Report No. 1093
Publisher: 
Federal Reserve Bank of New York, New York, NY
Abstract: 
Equilibrium assumptions posit relations between different people's beliefs and behavior without describing a process that causes these relations to hold. I show that because equilibrium models do not describe a causal process whereby one endogenous variable affects another, attempts to decompose the effects of shocks into "direct" and "indirect" effects can suggest misleading predictions about how these models work. Equilibrium assumptions also imply absurd paradoxes: history can determine future behavior without affecting any intervening state variables today; individuals can learn information that no one originally possesses by observing each other's actions. This makes equilibrium models unreliable tools to study how economic systems coordinate activity and aggregate dispersed information. I describe how to construct non-equilibrium models that avoid these paradoxes and can be interpreted causally.
Subjects: 
equilibrium
disequilibrium
mechanisms
causality
paradoxes
JEL: 
B41
C70
D50
D83
E70
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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