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On the Welfare Role of Redundant Assets with Heterogeneous Forecasts

Author

Listed:
  • Shurojit Chatterji

    (Singapore Management University)

  • Atsushi Kajii

    (Kwansei Gakuin University)

Abstract

We study a multiperiod model with a nominal bond that matures in one period and identify the set of efficient allocations that can be sustained as Walrasian equilibria with heterogeneous forecasts. We next add a long maturity bond, which under perfect foresight would be a redundant asset, and show that it fundamentally expands the set of efficient allocations that can be sustained as Walrasian equilibria. Indeed all wealth transfers compatible with efficiency can arise endogenously. The key feature driving this conclusion are forecasting errors, which lead to ex post arbitrage opportunities that induce these income transfers.

Suggested Citation

  • Shurojit Chatterji & Atsushi Kajii, 2023. "On the Welfare Role of Redundant Assets with Heterogeneous Forecasts," Working Papers on Central Bank Communication 046, University of Tokyo, Graduate School of Economics.
    • Handle: RePEc:upd:utmpwp:046
    as

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    References listed on IDEAS

    as
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    2. Radner, Roy, 1972. "Existence of Equilibrium of Plans, Prices, and Price Expectations in a Sequence of Markets," Econometrica, Econometric Society, vol. 40(2), pages 289-303, March.
    3. Krasa, Stefan & Werner, Jan, 1991. "Equilibria with options: Existence and indeterminacy," Journal of Economic Theory, Elsevier, vol. 54(2), pages 305-320, August.
    4. Atsushi Kajii, 1997. "On the Role of Options in Sunspot Equilibria," Econometrica, Econometric Society, vol. 65(4), pages 977-986, July.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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