A Simple Model of Useless Speculation
The paper presents a general equilibrium model of a pure exchange economy with stochastic endowment in which speculation is profitable and stabilizes prices, but is useless from a welfare point of view. Reconciling the Siegel paradox with the theory of incomplete markets we show that banning speculation by closing the forward exchange market may increase social welfare.
|Date of creation:||Nov 1990|
|Date of revision:|
|Publication status:||published as C and S working Paper , December 1995, Japanese Economic Review 51, (2000), pp. 85-95.|
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- Hart, Oliver D., 1975. "On the optimality of equilibrium when the market structure is incomplete," Journal of Economic Theory, Elsevier, vol. 11(3), pages 418-443, December.
- Samuelson, Paul A, 1972. "The Consumer Does Benefit From Feasible Price Stability," The Quarterly Journal of Economics, MIT Press, vol. 86(3), pages 476-93, August.
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- Paul R. Krugman, 1981. "Consumption Preferences, Asset Demands, and Distribution Effects in International Financial Markets," NBER Working Papers 0651, National Bureau of Economic Research, Inc.
- McCulloch, J Huston, 1975. "Operational Aspects of the Siegel Paradox: Comment," The Quarterly Journal of Economics, MIT Press, vol. 89(1), pages 170-72, February.
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