Equity, Bonds, Growth And Inflation In A Quadratic Infinite Horizon Economy
AbstractThis paper exhibits a class of infinite-horizon economies with incomplete markets (GEI) for which the equilibrium can be explicitly derived. We show that if agents have preference orderings represented by expected discounted quadratic utilities and if their endowments are tradable, then the equilibrium consumption and welfare of agents can be expressed as a function of the least variable income stream (LVI) obtainable by trading on the financial markets. If in addition the economy has a Markov structure, then the LVI can be calculated. The model is used to study the behavior of agents on the equity and bond markets in an economy in which the growth and inflation processes are calibrated to fit US data. Two related findings emerge: first, the proportion of bonds in the portfolios of even the most risk-averse agents is small (less than 2%); second, since equity dominates the portfolios of agents, the welfare loss due to variable inflation is small.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by California Davis - Department of Economics in its series Department of Economics with number 98-08.
Date of creation:
Date of revision:
Contact details of provider:
Postal: University of California Davis - Department of Economics. One Shields Ave., California 95616-8578
Phone: (530) 752-0741
Fax: (530) 752-9382
Web page: http://www.econ.ucdavis.edu/
More information through EDIRC
Other versions of this item:
- Martine Quinzii & Michael Magill & Julian R. Betts, 2003. "Equity, Bonds, Growth And Inflation In A Quadratic Infinite Horizon Economy," Working Papers 988, University of California, Davis, Department of Economics.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Schechtman, Jack, 1976. "An income fluctuation problem," Journal of Economic Theory, Elsevier, vol. 12(2), pages 218-241, April.
- Michael Magill & Martine Quinzii, 1997. "Which improves welfare more: A nominal or an indexed bond?," Economic Theory, Springer, vol. 10(1), pages 1-37.
- Manuel S. Santos & Michael Woodford, 1997.
"Rational Asset Pricing Bubbles,"
Econometric Society, vol. 65(1), pages 19-58, January.
- Manuel S. Santos & Michael Woodford, 1993. "Rational Asset Pricing Bubbles," Working Papers 9304, Centro de Investigacion Economica, ITAM.
- Santos, Manuel S. & Woodford, Michael, . "Rational asset pricing bubbles," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/3913, Universidad Carlos III de Madrid.
- Yaari, Menahem E., 1976. "A law of large numbers in the theory of consumer's choice under uncertainty," Journal of Economic Theory, Elsevier, vol. 12(2), pages 202-217, April.
- Magill, Michael & Quinzii, Martine, 1996.
"Incomplete markets over an infinite horizon: Long-lived securities and speculative bubbles,"
Journal of Mathematical Economics,
Elsevier, vol. 26(1), pages 133-170.
- Magill, M. & Quinzii, M., 1993. "Icomplete Markets Over an Infinite Horizon: Long-Lived Securities and Speculative Bubbles," Papers 9321, Southern California - Department of Economics.
- Neumeyer, Pablo Andres, 1998.
"Currencies and the Allocation of Risk: The Welfare Effects of a Monetary Union,"
American Economic Review,
American Economic Association, vol. 88(1), pages 246-59, March.
- Neumeyer, P.A., 1995. "Currencies and the Allocation of Risk: The Welfare Effect of a Monetary Union," DELTA Working Papers 95-27, DELTA (Ecole normale supérieure).
- Mehra, Rajnish & Prescott, Edward C., 1985.
"The equity premium: A puzzle,"
Journal of Monetary Economics,
Elsevier, vol. 15(2), pages 145-161, March.
- Neumeyer, Pablo Andres, 1998. "Inflation-stabilization risk in economies with incomplete asset markets," Journal of Economic Dynamics and Control, Elsevier, vol. 23(3), pages 371-391, November.
- Chris I. Telmer, 1991.
"Asset Pricing Puzzles and Incomplete Markets,"
806, Queen's University, Department of Economics.
- Woodford, Michael, 1990. "The optimum quantity of money," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 20, pages 1067-1152 Elsevier.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel).
If references are entirely missing, you can add them using this form.