Authors: Keshav Dogra
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Staff Reports
Paradoxes and Problems in the Causal Interpretation of Equilibrium Economics
Number 1093
March 2024
March 2024
JEL classification: B41, C70, D50, D83
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.
Author Disclosure Statement(s)
Keshav Dogra
I declare that I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy.
I declare that I have no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy.
Suggested Citation:
Dogra, Keshav. 2024. “Paradoxes and Problems in the Causal Interpretation of Equilibrium Economics.” Federal Reserve Bank of New York Staff Reports, no. 1093, March. https://doi.org/10.59576/sr.1093
Dogra, Keshav. 2024. “Paradoxes and Problems in the Causal Interpretation of Equilibrium Economics.” Federal Reserve Bank of New York Staff Reports, no. 1093, March. https://doi.org/10.59576/sr.1093
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