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Asset Markets and Equilibrium Processes

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  • Jayasri Dutta
  • Herakles Polemarchakis

Abstract

The failure of the asset market to be complete causes serial dependence in output and prices, which is suboptimal. We consider an economy with white noise shocks. When the asset market is complete, an optimal, competitive allocation inherits this strong stationarity. When the asset market is only sequentially complete, prices and output necessarily display serial dependence at equilibrium. The further incompleteness of a monetary economy explains co-movements in real and nominal variables.

Suggested Citation

  • Jayasri Dutta & Herakles Polemarchakis, 1990. "Asset Markets and Equilibrium Processes," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 57(2), pages 229-254.
    • Handle: RePEc:oup:restud:v:57:y:1990:i:2:p:229-254.
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    File URL: http://hdl.handle.net/10.2307/2297380
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    Cited by:

    1. Barbie, Martin & Hagedorn, Marcus & Kaul, Ashok, 2000. "Dynamic Efficiency and Pareto Optimality in a Stochastic OLG Model with Production and Social Security," IZA Discussion Papers 209, Institute of Labor Economics (IZA).
    2. Sujoy Mukerji & Jean-Marc Tallon, 2001. "Ambiguity Aversion and Incompleteness of Financial Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 68(4), pages 883-904.
    3. Barbie, Martin & Hagedorn, Marcus & Kaul, Ashok, 2001. "Government Debt as Insurance against Macroeconomic Risk," IZA Discussion Papers 412, Institute of Labor Economics (IZA).
    4. Chattopadhyay, Subir & Gottardi, Piero, 1999. "Stochastic OLG Models, Market Structure, and Optimality," Journal of Economic Theory, Elsevier, vol. 89(1), pages 21-67, November.

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