Completing Markets in a One-Good, Pure Exchange Economy Without State-Contingent Securities
Pareto-efficient consumption in a pure-exchange, one good economy varies over states of nature with respect to only two factors: real aggregate supply and individual utility shocks. One’s optimal contract receipts vary with respect to only these two factors and the ratio of one’s endowment to real aggregate supply. How one’s Pareto-efficient consumption varies with real aggregate supply depends solely on how one’s relative risk aversion compares to the average. Complete markets can be approximately achieved by four contracts dealing with these factors. This has implications concerning central banking, efficient insurance contract design, and a possible new financial innovation.
|Date of creation:||15 Jan 2005|
|Date of revision:|
|Note:||Type of Document - pdf; pages: 42. Paper has policy implications concerning monetary policy and goals, insurance contract design, and optimal inflation indexing|
|Contact details of provider:|| Web page: http://econwpa.repec.org|
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"The welfare gain from the introduction of indexed bonds,"
Federal Reserve Bank of Cleveland, pages 612-635.
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