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The Unit Root Property When Markets Are Sequentially Incomplete

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Author Info
Antonio Jiménez-Martínez (Universidad de Alicante)
Subir Chattopadhyay (Universidad de Alicante)

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Abstract

We consider pure exchange, one good OLG economies under stationary Markov uncertainty. It is known that when markets are sequentially complete, a stationary equilibrium at which the agents common matrix of intertemporal rates of substitution has a Perron root which is less than or equal to one is conditionally Pareto optimal (CPO). We assume that there exists a long-lived dividend paying asset and show that if dividends are strictly positive then the relation between the unit root condition and optimality holds even if markets are not sequentially complete. However, every equilibrium allocation is shown to be constrained CPO under the additional requirement that assets be freely disposable, which seems reasonable when dividends are positive and whose importance was pointed out by Santos and Woodford (1997) in their work on bubbles; this fact undermines the relation between the unit root property and optimality. The relation is less clear when dividends and asset prices are allowed to be negative in some states.

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Publisher Info
Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2000-32.

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Length: 15 pages
Date of creation: Dec 2000
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Publication status: Published by Ivie
Handle: RePEc:ivi:wpasad:2000-32

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Related research
Keywords: Stochastic Overlapping Generations Models; IncompleteMarkets;

Find related papers by JEL classification:
D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

References listed on IDEAS
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.:

  1. Rao Aiyagari, S. & Peled, Dan, 1991. "Dominant root characterization of Pareto optimality and the existence of optimal equilibria in stochastic overlapping generations models," Journal of Economic Theory, Elsevier, vol. 54(1), pages 69-83, June. [Downloadable!] (restricted)
  2. Gabrielle Demange & Guy Laroque, 1999. "Social Security and Demographic Shocks," Econometrica, Econometric Society, vol. 67(3), pages 527-542, May.
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  3. Manuel S. Santos & Michael Woodford, 1997. "Rational Asset Pricing Bubbles," Econometrica, Econometric Society, vol. 65(1), pages 19-58, January.
    Other versions:
  4. Cass, David & Green, Richard C & Spear, Stephen E, 1992. "Stationary Equilibria with Incomplete Markets and Overlapping Generations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(3), pages 495-512, August. [Downloadable!] (restricted)
  5. Gottardi, Piero, 1996. "Stationary Monetary Equilibria in Overlapping Generations Models with Incomplete Markets," Journal of Economic Theory, Elsevier, vol. 71(1), pages 75-89, October. [Downloadable!] (restricted)
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  1. Subir Chattopadhyay, 2001. "Long-Lived Assets, Incomplete Markets, And Optimality," Working Papers. Serie AD 2001-10, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
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