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Two equivalence theorems for government finance

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  • Dahai Yu
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    Abstract

    This paper studies the effects of a path change in government debt composition and aggregate transfers on allocations and prices. It is shown that the effects are zero under some agent-specific transfer scheme even when markets are incomplete. If markets are complete, then the effects are zero under any transfer scheme that leaves each agent's lifetime resource unchanged if and only if agents are always collectively compensated for next period's return change. The infinite-horizon framework used has an arbitrary number of assets with arbitrary returns and an arbitrary mixture of finitely and infinitely lived agents.

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    File URL: http://www.federalreserve.gov/pubs/ifdp/1998/622/default.htm
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    File URL: http://www.federalreserve.gov/pubs/ifdp/1998/622/ifdp622.pdf
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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 622.

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    Date of creation: 1998
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    Handle: RePEc:fip:fedgif:622

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    Keywords: Finance; Public;

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    1. Bryant, John & Wallace, Neil, 1984. "A Price Discrimination Analysis of Monetary Policy," Review of Economic Studies, Wiley Blackwell, vol. 51(2), pages 279-88, April.
    2. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
    3. Wallace, Neil, 1981. "A Modigliani-Miller Theorem for Open-Market Operations," American Economic Review, American Economic Association, vol. 71(3), pages 267-74, June.
    4. Robert E. Lucas, Jr. & Nancy L. Stokey, 1987. "Money and Interest in a Cash-in-Advance Economy," NBER Working Papers 1618, National Bureau of Economic Research, Inc.
    5. DeMarzo, Peter M., 1988. "An extension of the Modigliani-Miller theorem to stochastic economies with incomplete markets and interdependent securities," Journal of Economic Theory, Elsevier, vol. 45(2), pages 353-369, August.
    6. Stiglitz, Joseph E, 1969. "A Re-Examination of the Modigliani-Miller Theorem," American Economic Review, American Economic Association, vol. 59(5), pages 784-93, December.
    7. Stiglitz, Joseph E, 1974. "On the Irrelevance of Corporate Financial Policy," American Economic Review, American Economic Association, vol. 64(6), pages 851-66, December.
    8. Detemple, J. & Gottardi, P. & Polemarchakis, H., 1990. "The relevance of financial policy," CORE Discussion Papers 1990011, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    9. Hernandez D., Alejandro & Santos, Manuel S., 1996. "Competitive Equilibria for Infinite-Horizon Economies with Incomplete Markets," Journal of Economic Theory, Elsevier, vol. 71(1), pages 102-130, October.
    10. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
    11. Gottardi, Piero, 1995. "An Analysis of the Conditions for the Validity of Modigliani-Miller Theorem with Incomplete Markets," Economic Theory, Springer, vol. 5(2), pages 191-207, March.
    12. Manuel S. Santos & Michael Woodford, 1997. "Rational Asset Pricing Bubbles," Econometrica, Econometric Society, vol. 65(1), pages 19-58, January.
    13. Chamley, Christophe & Polemarchakis, Herakles, 1984. "Assets, General Equilibrium and the Neutrality of Money," Review of Economic Studies, Wiley Blackwell, vol. 51(1), pages 129-38, January.
    14. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
    15. Brock, William A, 1974. "Money and Growth: The Case of Long Run Perfect Foresight," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(3), pages 750-77, October.
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