IDEAS home Printed from https://ideas.repec.org/a/eee/ecolet/v136y2015icp125-128.html

On the irrelevance of financial policy under market incompleteness and trading constraints

Author

Listed:
  • Atesagaoglu, Orhan Erem
  • Carceles-Poveda, Eva

Abstract

We study the Modigliani and Miller Theorem under portfolio constraints. We show that there exist state-dependent trading limits under which financial policy is irrelevant. In addition, a no short-selling constraint on equity is innocuous in spite of being state-independent.

Suggested Citation

  • Atesagaoglu, Orhan Erem & Carceles-Poveda, Eva, 2015. "On the irrelevance of financial policy under market incompleteness and trading constraints," Economics Letters, Elsevier, vol. 136(C), pages 125-128.
    • Handle: RePEc:eee:ecolet:v:136:y:2015:i:c:p:125-128
    DOI: 10.1016/j.econlet.2015.09.007
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165176515003572
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.econlet.2015.09.007?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Manuel S. Santos & Michael Woodford, 1997. "Rational Asset Pricing Bubbles," Econometrica, Econometric Society, vol. 65(1), pages 19-58, January.
    2. S. Rao Aiyagari, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(3), pages 659-684.
    3. Yann Algan & Olivier Allais & Eva Carceles-Poveda, 2009. "Macroeconomic implications of financial policy," Sciences Po Economics Publications (main) hal-03596477, HAL.
    4. Stiglitz, Joseph E, 1969. "A Re-Examination of the Modigliani-Miller Theorem," American Economic Review, American Economic Association, vol. 59(5), pages 784-793, December.
    5. Gottardi, Piero, 1995. "An Analysis of the Conditions for the Validity of Modigliani-Miller Theorem with Incomplete Markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 5(2), pages 191-207, March.
    6. Stiglitz, Joseph E, 1974. "On the Irrelevance of Corporate Financial Policy," American Economic Review, American Economic Association, vol. 64(6), pages 851-866, December.
    7. DeMarzo, Peter M., 1988. "An extension of the Modigliani-Miller theorem to stochastic economies with incomplete markets and interdependent securities," Journal of Economic Theory, Elsevier, vol. 45(2), pages 353-369, August.
    8. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October.
    9. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yann Algan & Olivier Allais & Eva Carceles-Poveda, 2009. "Macroeconomic Effects of Financial Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 678-696, October.
    2. Dahai Yu, 1998. "Two equivalence theorems for government finance," International Finance Discussion Papers 622, Board of Governors of the Federal Reserve System (U.S.).
    3. Detemple, J. & Gottardi, P. & Polemarchakis, H. M., 1995. "The relevance of financial policy," European Economic Review, Elsevier, vol. 39(6), pages 1133-1154, June.
    4. Krebs, Tom, 2004. "Non-existence of recursive equilibria on compact state spaces when markets are incomplete," Journal of Economic Theory, Elsevier, vol. 115(1), pages 134-150, March.
    5. Krebs, Tom & Wilson, Bonnie, 2004. "Asset returns in an endogenous growth model with incomplete markets," Journal of Economic Dynamics and Control, Elsevier, vol. 28(4), pages 817-839, January.
    6. Eva Carceles-Poveda, 2009. "Asset Prices and Business Cycles under Market Incompleteness," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(3), pages 405-422, July.
    7. Krebs, Tom & Wilson, Bonnie, 2004. "Asset returns in an endogenous growth model with incomplete markets," Journal of Economic Dynamics and Control, Elsevier, vol. 28(4), pages 817-839, January.
    8. Richard M. H. Suen, 2014. "Time Preference And The Distributions Of Wealth And Income," Economic Inquiry, Western Economic Association International, vol. 52(1), pages 364-381, January.
    9. Marcet, Albert & Obiols-Homs, Francesc & Weil, Philippe, 2007. "Incomplete markets, labor supply and capital accumulation," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2621-2635, November.
    10. Per Krusell & Anthony Smith & Joachim Hubmer, 2015. "The historical evolution of the wealth distribution: A quantitative-theoretic investigation," 2015 Meeting Papers 1406, Society for Economic Dynamics.
    11. David Rezza Baqaee & Emmanuel Farhi, 2018. "Macroeconomics with Heterogeneous Agents and Input-Output Networks," NBER Working Papers 24684, National Bureau of Economic Research, Inc.
    12. Ma Eunseong & Park Kwangyong, 2025. "Gini in the Taylor Rule: Should the Fed Care About Inequality?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 25(1), pages 241-285.
    13. Olivier Allais & Yann Algan & Edouard Challe & Xavier Ragot, 2020. "The Welfare Cost of Inflation Risk under Imperfect Insurance," Annals of Economics and Statistics, GENES, issue 138, pages 1-20.
    14. Tanaka, Ken'ichiro & Toda, Alexis Akira, 2015. "Discretizing Distributions with Exact Moments: Error Estimate and Convergence Analysis," University of California at San Diego, Economics Working Paper Series qt7g23r5kh, Department of Economics, UC San Diego.
    15. Tom Krebs & Pravin Krishna & William Maloney, 2010. "Trade Policy, Income Risk, and Welfare," The Review of Economics and Statistics, MIT Press, vol. 92(3), pages 467-481, August.
    16. François Le Grand & Xavier Ragot, 2022. "Managing Inequality Over Business Cycles: Optimal Policies With Heterogeneous Agents And Aggregate Shocks," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(1), pages 511-540, February.
    17. Minchul Yum, 2018. "On the distribution of wealth and employment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 86-105, October.
    18. Maarten Janssen & Sandro Shelegia, 2012. "Consumer Search and Vertical Relations: The Triple Marginalization Problem," Vienna Economics Papers 1206, University of Vienna, Department of Economics.
    19. Minchul Yum, 2023. "Parental Time Investment And Intergenerational Mobility," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(1), pages 187-223, February.
    20. Benhabib, Jess & Bisin, Alberto & Zhu, Shenghao, 2015. "The wealth distribution in Bewley economies with capital income risk," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 489-515.

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • G1 - Financial Economics - - General Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecolet:v:136:y:2015:i:c:p:125-128. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ecolet .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.