Asset Prices and Business Cycles under Market Incompleteness

Eva Carceles-Poveda ()

Review of Economic Dynamics, 2009, vol. 12, issue 3, pages 405-422

Abstract: In this paper, we study the quantitative implications of a real business cycle model where the firm is the capital owner, households are heterogeneous, and markets are incomplete due to restricted asset trade. Since, under these assumptions, the usual firm objective is no longer well defined, several non-standard objectives are incorporated into the model. These include variants of market value maximization and a utility function for the firm. We find that the presence of market incompleteness alters little the behavior of asset returns. On the other hand, the behavior of the macroeconomic aggregates is quite sensitive to the firm objective, which affects the capital accumulation path. In contrast to conventional findings, capital is not necessarily higher when markets are incomplete. In addition, the different capital accumulation effects imply that shareholders with different asset wealth might prefer different firm objectives. (Copyright: Elsevier)

Keywords: Asset prices; Incomplete markets; RBC model; Firm objectives (search for similar items in EconPapers)
JEL-codes: D52 E44 G12 L20 (search for similar items in EconPapers)
Date: 2009
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