Stabilizing, Pareto Improving Policies in an OLG model with Incomplete Markets: The Rational Expectations and Rational Beliefs Case
One way to interpret the current policies of many central banks is that they seek to stabilize economic activity. One possible justification for such a policy is that there is volatility in macro variables that individual agents cannot insure against. We study the simplest possible extension of the stochastic 2-period, one agent and one commodity OLG model, where we have added 1 more period, with only one potential activity, namely trading of contingent commodities. We assume, however, that markets are incomplete. In this case the monetary equilibrium is not Pareto Optimal and for an open set of economies an equilibrium where fluctuations in realized savings are removed Pareto dominates the monetary equilibrium. A combination of fiscal and monetary policy may achieve this equilibrium . The policy considered has a simple rationale, namely that it removes some of the uncertainty that agents face by reducing price or interest rate volatility. We consider two fundamental sources of such volatility, namely respectively an objective and a subjective signal about the distribution of future endowments. The first case is when agents have Rational Expectations while the second case is studied in the context of agents having Rational Beliefs, beliefs which are consistent with empirical observations but not (necessarily) correct.}
|Date of creation:||11 Aug 2004|
|Date of revision:|
|Contact details of provider:|| Phone: 1 212 998 3820|
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
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.:
- Peled, Dan, 1982. "Informational diversity over time and the optimality of monetary equilibria," Journal of Economic Theory, Elsevier, vol. 28(2), pages 255-274, December.
- Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April.
- Lawrence J. Christiano & Sharon G. Harrison, 1996.
"Chaos, Sunspots, and Automatic Stabilizers,"
NBER Working Papers
5703, National Bureau of Economic Research, Inc.
- Lawrence J. Christiano & Sharon G. Harrison, 1996. "Chaos, sunspots, and automatic stabilizers," Working Paper Series, Macroeconomic Issues WP-96-16, Federal Reserve Bank of Chicago.
- Lawrence J. Christiano & Sharon G. Harrison, 1996. "Chaos, sunspots, and automatic stabilizers," Staff Report 214, Federal Reserve Bank of Minneapolis.
- Gottardi, Piero, 1995. "Does sunspot monetary policy matter?," Economics Letters, Elsevier, vol. 47(3-4), pages 297-303, March.
- Azariadis, Costas, 1981. "Self-fulfilling prophecies," Journal of Economic Theory, Elsevier, vol. 25(3), pages 380-396, December.
- Duffie, Darrell, et al, 1994. "Stationary Markov Equilibria," Econometrica, Econometric Society, vol. 62(4), pages 745-81, July.
- Laurent-Emmanuel Calvet, 2001.
"Incomplete Markets and Volatility,"
- Laurent E. Calvet, 1999. "Incomplete Markets and Volatility," Harvard Institute of Economic Research Working Papers 1865, Harvard - Institute of Economic Research.
- Peled, Dan, 1984. "Stationary pareto optimality of stochastic asset equilibria with overlapping generations," Journal of Economic Theory, Elsevier, vol. 34(2), pages 396-403, December.
- Kurz, Mordecai & Wu, Ho-Mou, 1996.
"Endogenous Uncertainty in a General Equilibrium Model with Price Contingent Contracts,"
Springer;Society for the Advancement of Economic Theory (SAET), vol. 8(3), pages 461-88, October.
- Ho-Mou Wu & Mordecai Kurz, 1996. "Endogenous uncertainty in a general equilibrium model with price contingent contracts (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 8(3), pages 461-488.
- Mordecai Kurz & Ho-Mou Wu, . "Endogenous Uncertainty in a General Equilibrium Model with Price Contingent Contracts," Working Papers 96002, Stanford University, Department of Economics.
- Balasko, Yves & Shell, Karl, 1980. "The overlapping-generations model, I: The case of pure exchange without money," Journal of Economic Theory, Elsevier, vol. 23(3), pages 281-306, December.
- Mark P. Taylor, 1995. "The Economics of Exchange Rates," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 13-47, March.
- 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.
- Maurice Salles, 2005. "Social Choice," Post-Print halshs-00337075, HAL.
- Kent Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 1998. "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance, American Finance Association, vol. 53(6), pages 1839-1885, December.
When requesting a correction, please mention this item's handle: RePEc:ecm:feam04:617. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.