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Asset Prices, Substitution Effects, and the Impact of Changes in Asset Stocks

  • Carl E. Walsh

The standard result in macroeconomic models is that an increase in the stock of government debt has an ambiguous effect on aggregate demand. Models which have derived this result have assumed that all assets are gross substitutes. Some recent work within the framework of mean-variance portfolio models, however, seems to imply that the assumption that all assets are gross substitutes is sufficient to determine whether an increase in government debt is expansionary or contractionary. This apparent inconsistency is resolved by showing that gross substitutability is sufficient to sign the impact of a change in government debt only when money is riskless. To carry out the analysis, portfolio choice and equilibrium asset prices are characterized in a new way through the use of a distance function.

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File URL: http://www.nber.org/papers/w0566.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0566.

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Date of creation: Oct 1980
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Publication status: published as Walsh, Carl E. "Asset Prices, Asset Stocks and Rational Expectations." Journal of Monetary Economics, Vol. 11, No. 3, (May 1983), pp. 337-349.
Handle: RePEc:nbr:nberwo:0566
Note: ME
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  1. Cass, David & Stiglitz, Joseph E., 1970. "The structure of investor preferences and asset returns, and separability in portfolio allocation: A contribution to the pure theory of mutual funds," Journal of Economic Theory, Elsevier, vol. 2(2), pages 122-160, June.
  2. Walsh, Carl E., 1982. "Asset substitutability and monetary policy : An alternative characterization," Journal of Monetary Economics, Elsevier, vol. 9(1), pages 59-71.
  3. Blanchard, Olivier J & Plantes, Mary Kay, 1977. "A Note on Gross Substitutability of Financial Assets," Econometrica, Econometric Society, vol. 45(3), pages 769-71, April.
  4. Angus Deaton, 1979. "Optimal Taxes and the Structure of Preferences," Working Papers 506, Princeton University, Department of Economics, Industrial Relations Section..
  5. Deaton, Angus, 1979. "The Distance Function in Consumer Behaviour with Applications to Index Numbers and Optimal Taxation," Review of Economic Studies, Wiley Blackwell, vol. 46(3), pages 391-405, July.
  6. Yung Chul Park, 1972. "Some Current Issues on the Transmission Process of Monetary Policy (Le processus de transmission de la politique monétaire: quelques questions d'actualité) (Algunas cuestiones de actualidad sobre el," IMF Staff Papers, Palgrave Macmillan, vol. 19(1), pages 1-45, March.
  7. Cohen, Darrel & McMenamin, J Stuart, 1978. "The Role of Fiscal Policy in a Financially Disaggregated Macroeconomic Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 10(3), pages 322-36, August.
  8. James Tobin & William C. Brainard, 1962. "Financial Intermediaries and the Effectiveness of Monetary Controls," Cowles Foundation Discussion Papers 63R, Cowles Foundation for Research in Economics, Yale University.
  9. Roley, V Vance, 1979. "A Theory of Federal Debt Management," American Economic Review, American Economic Association, vol. 69(5), pages 915-26, December.
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