Completing Markets in a One-Good, Pure Exchange Economy Without State-Contingent Securities

David Eagle ()

Finance from EconWPA

Abstract: 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.

Keywords: complete markets; inflation indexing; nominal-income targeting; inflation targeting; price-level targeting; monetary policy (search for similar items in EconPapers)
JEL-codes: E (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin and nep-mac
Date: 2005-01-15
Note: Type of Document - pdf; pages: 42. Paper has policy implications concerning monetary policy and goals, insurance contract design, and optimal inflation indexing
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0501009

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