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Asset prices and capital accumulation in a monetary economy with incomplete markets

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  • sunanda roy

    (drake university)

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    Abstract

    The paper studies asset prices and capital accumulation in a monetary economy with non-diversifiable idiosyncratic risks (incomplete markets). A government issued unbacked currency is introduced into agent's preferences in a dynamic GEI (General Equilibrium with Incomplete market) model with CARA preferences and normal disturbances. Closed form expressions for equlibrium allocations and prices are derived under finite and infinite horizons. The paper addresses several monetary issues. In particular, money is shown to be neutral but not superneutral at the steady state. The rate of inflation is shown to adversely affect the steady state capital stock under some situations. Finally the Friedman rule is shown to be non-optimal for some economies.

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    File URL: http://128.118.178.162/eps/ge/papers/0508/0508002.pdf
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    Bibliographic Info

    Paper provided by EconWPA in its series GE, Growth, Math methods with number 0508002.

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    Length: 39 pages
    Date of creation: 09 Aug 2005
    Date of revision:
    Handle: RePEc:wpa:wuwpge:0508002

    Note: Type of Document - pdf; pages: 39
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    Web page: http://128.118.178.162

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    1. Robert J. Barro, 1996. "Determinants of Economic Growth: A Cross-Country Empirical Study," NBER Working Papers 5698, National Bureau of Economic Research, Inc.
    2. V. V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1991. "Optimal fiscal and monetary policy: some recent results," Staff Report 147, Federal Reserve Bank of Minneapolis.
    3. Bruno, Michael & Easterly, William, 1995. "Inflation crises and long-run growth," Policy Research Working Paper Series 1517, The World Bank.
    4. Calvet, Laurent E., 2001. "Incomplete Markets and Volatility," Journal of Economic Theory, Elsevier, vol. 98(2), pages 295-338, June.
    5. Bernheim, B Douglas, 1991. "Optimal Fiscal and Monetary Policy: Some Recent Results," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 540-42, August.
    6. Javier Andrés & Ignacio Hernando, 1999. "Does Inflation Harm Economic Growth? Evidence from the OECD," NBER Chapters, in: The Costs and Benefits of Price Stability, pages 315-348 National Bureau of Economic Research, Inc.
    7. Miles Kimball & Philippe Weil, 1992. "Precautionary Saving and Consumption Smoothing Across Time and Possibilities," NBER Working Papers 3976, National Bureau of Economic Research, Inc.
    8. Gottardi, P., 1990. "On The Non Neutrality Of Money With Incomplete Market," Papers 158, Cambridge - Risk, Information & Quantity Signals.
    9. Athanasoulis, Stefano G., 2005. "Asset pricing from primitives: closed form solutions to asset prices, consumption, and portfolio demands," Journal of Economic Dynamics and Control, Elsevier, vol. 29(3), pages 423-447, March.
    10. Christian Gollier, 2004. "The Economics of Risk and Time," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572249, December.
    11. Aiyagari, S Rao, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 659-84, August.
    12. George-Marios Angeletos, 2005. "Uninsured Idiosyncratic Investment Risk," NBER Working Papers 11180, National Bureau of Economic Research, Inc.
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