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The Efficiency of Financial Markets with High Inflation

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  • Neumeyer, P. A.

Abstract

In a two period general equilibrium model with incomplete asset markets, it is shown that the contraction of nominal financial markets that occurs during high inflations can result from the variability of the future rate of inflation and from large bankruptcy costs. If the probability that inflation in the future will be high is sufficiently large, then, for a generic set of endowments, an increase in the variability of future prices reduces the utility possibilities set. In economies with only nominal assets more variable future prices lead to a Pareto fall in social welfare.
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  • Neumeyer, P. A., 1994. "The Efficiency of Financial Markets with High Inflation," DELTA Working Papers 94-11, DELTA (Ecole normale supérieure).
    • Handle: RePEc:del:abcdef:94-11
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    References listed on IDEAS

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    1. John Geanakoplos & Pradeep Dubey, 1989. "Liquidity and Bankruptcy with Incomplete Markets: Pure Exchange," Cowles Foundation Discussion Papers 900, Cowles Foundation for Research in Economics, Yale University.
    2. Balasko, Yves & Cass, David, 1989. "The Structure of Financial Equilibrium with Exogenous Yields: The Case of Incomplete Markets," Econometrica, Econometric Society, vol. 57(1), pages 135-162, January.
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