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On the Welfare Role of Redundant Assets with Heterogeneous Forecasts

Shurojit Chatterji and Atsushi Kajii
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Shurojit Chatterji: Singapore Management University

No 46, Working Papers on Central Bank Communication from University of Tokyo, Graduate School of Economics

Abstract: We study a multiperiod model with a nominal bond that matures in one period and identify the set of efficient allocations that can be sustained as Walrasian equilibria with heterogeneous forecasts. We next add a long maturity bond, which under perfect foresight would be a redundant asset, and show that it fundamentally expands the set of efficient allocations that can be sustained as Walrasian equilibria. Indeed all wealth transfers compatible with efficiency can arise endogenously. The key feature driving this conclusion are forecasting errors, which lead to ex post arbitrage opportunities that induce these income transfers.

JEL-codes: D51 D53 D61 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2023-03
New Economics Papers: this item is included in nep-des and nep-sea
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