Disequilibrium model with rationing in two markets

Abstract

Following the growing awareness of' the inadequacies of equilibrium economics a lot of effort has gone into the development of a macroeconomic theory where markets do not clear. The disequilibrium models derived from this theory allow for transactions to occur at non-equilibrium prices and therefore, the emergence of rationing and spillover effects. 'This study formulates a disequilibrium model for an economy segmented into the goods, labour and money markets while emphasising the money market. The model allows the analysis of simultaneous contraints in two markets,.it includes money balances and in the utility function of the household, and money balances arid inventories in the objective function of the firm. The model is consistent with the behaviour of individual agents in ' the economy and captures the spillover effects between markets; it therefore allows a study of some monetary and fiscal policies.

The Kenyan economy is analysed in the light of' the model. It is argued that the labour market is characterised by persistent disequilibrium with households on the long side. The goods market is at, or close to, some equilibrium. The money market is hypothesised to be characterised by disequilibrium. It is argued that the commercial banks’ liquidity ratio is a reliable indicator of the state of the money market and could be used to test disequilibrium in the money market.