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A Simple Model of Useless Speculation

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Author Info
Murray C. Kemp
Hans-Werner Sinn

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Abstract

The paper presents a general equilibrium model of a pure exchange economy with stochastic endowment in which speculation is profitable and stabilizes prices, but is useless from a welfare point of view. Reconciling the Siegel paradox with the theory of incomplete markets we show that banning speculation by closing the forward exchange market may increase social welfare.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3513.

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Date of creation: Nov 1990
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Handle: RePEc:nbr:nberwo:3513

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References listed on IDEAS
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  1. Samuelson, Paul A, 1972. "The Consumer Does Benefit From Feasible Price Stability," The Quarterly Journal of Economics, MIT Press, vol. 86(3), pages 476-93, August. [Downloadable!] (restricted)
  2. Hart, Oliver D., 1975. "On the optimality of equilibrium when the market structure is incomplete," Journal of Economic Theory, Elsevier, vol. 11(3), pages 418-443, December. [Downloadable!] (restricted)
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This page was last updated on 2009-12-18.

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