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The role of fiscal policy in an incomplete markets framework

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  • Charles P. Thomas

Abstract

A general-equilibrium model is developed to highlight the link between neo-Keynesian models of unemployment and recent results on the constrained suboptimality of competitive economies with incomplete asset markets. Although the model deviates from the Arrow-Debreu paradigm only by the absence of some contingent claims, the competitive equilibrium exhibits underemployment and balanced-budget fiscal policies have Keynesian effects which are Pareto improving.

Suggested Citation

  • Charles P. Thomas, 1993. "The role of fiscal policy in an incomplete markets framework," International Finance Discussion Papers 451, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:451
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    References listed on IDEAS

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    1. Geanakoplos, J. D. & Polemarchakis, H. M., 1990. "Observability and optimality," Journal of Mathematical Economics, Elsevier, vol. 19(1-2), pages 153-165.
    2. Rafael Repullo, 1988. "The Core of an Economy with Transaction Costs," Review of Economic Studies, Oxford University Press, vol. 55(3), pages 447-458.
    3. Geanakoplos, John, 1990. "An introduction to general equilibrium with incomplete asset markets," Journal of Mathematical Economics, Elsevier, vol. 19(1-2), pages 1-38.
    4. Bruce Greenwald & Joseph E. Stiglitz, 1993. "New and Old Keynesians," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 23-44, Winter.
    5. Geanakoplos, J. & Magill, M. & Quinzii, M. & Dreze, J., 1990. "Generic inefficiency of stock market equilibrium when markets are incomplete," Journal of Mathematical Economics, Elsevier, vol. 19(1-2), pages 113-151.
    6. David Romer, 1993. "The New Keynesian Synthesis," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 5-22, Winter.
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    Cited by:

    1. Andersen, Torben M., 2001. "Active stabilization policy and uninsurable risks," Economics Letters, Elsevier, vol. 72(3), pages 347-354, September.
    2. Summer, Martin, 2002. "Financial markets, the structure of long-term investments and labour income risks," Research in Economics, Elsevier, vol. 56(3), pages 265-298, September.
    3. Partha Sen, 2009. "Fixed Costs, The Balanced Budget Multiplier And Welfare," The Japanese Economic Review, Japanese Economic Association, vol. 60(3), pages 395-404, September.
    4. Gaël Giraud & Cécile Renouard, 2011. "In search of an alternative to shareholder value maximization," Post-Print hal-00609153, HAL.
    5. Andersen, Torben M. & Spange, Morten, 2006. "International interdependencies in fiscal stabilization policies," European Economic Review, Elsevier, vol. 50(5), pages 1169-1195, July.
    6. Andersen, T.M. & Holden, S., 1998. "Business Cycles and Fiscal Policy in an Open Economy," Memorandum 12/1998, Oslo University, Department of Economics.
    7. Andersen, Torben M. & Holden, Steinar, 2002. "Stabilization policy in an open economy," Journal of Macroeconomics, Elsevier, vol. 24(3), pages 293-312, September.

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    Keywords

    Fiscal policy;

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