SFB 303 Discussion Paper No. A - 203

Author: Dutta, Jayasri, and Herakles Polemarchakis
Title: Asset Markets and Equilibrium Processes
Abstract: The failure of the asset market to be complete causes serial dependence in output and prices, which is suboptimal.We consider an economy with white noise shocks. When the asset market is complete, an optimal, competitive allocation inherits this strong stationarity. When the asset market is only sequentially complete, prices and output necessarily display serial dependence at equilibrium. The further incompleteness of a monetary economy explains comovements in real and nominal variables.
Creation-Date: July 1988
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