This paper investigates the stability of competitive equilibria of two-period Arrow-Debreu economies by reinterpreting the period zero component as a temporary equilibrium associated with rationally expected period one prices. Any change of the period zero prices induces a change in the value of the expected period one prices. These revised expectations induce in turn new values for the period zero prices in order for the supply and demand of period zero to remain equal, a process that can go on indefinitely. This defines a dynamical system, the fixed points of which are the (period zero) temporary equilibria; local asymptotic stability for this dynamics, or expectational stability, captures the effect of expectations formation on the stability of equilibria. A Walrasian equilibrium of a two-period Arrow-Debreu economy is expectatio- nally stable if the corresponding (period zero) temporary equilibrium is itself expectationally stable. We show the following properties of Walrasian equilibria: expectational stability is different from tatonnement and Hicksian stability; the set of expectationally stable equilibria has a non-empty interior that contains the set of no-trade equilibria; equilibria that satisfy the gross substitutability property are expectationally stable.
