EconPapers    
Economics at your fingertips  
 

General economic equilibrium with financial markets and retainability

A. Jofré (), R. T. Rockafellar () and R. J-B. Wets ()
Additional contact information
A. Jofré: University of Chile
R. T. Rockafellar: University of Washington
R. J-B. Wets: University of California

Economic Theory, 2017, vol. 63, issue 1, 309-345

Abstract: Abstract A theory of economic equilibrium for incomplete financial markets in general real assets is developed in a new formulation with currency-denominated prices. The “goods” are not only commodities, and they can influence utility through retention as an alternative to consumption. Perfect foresight is relinquished in a rolling horizon approach to markets which lets agents pursue long-term interests without being sure of future prices. The framework is that of an economy operating in a fiat currency that agents find attractive to retain, in balance with other needs. The attractiveness comes from Keynesian considerations about uncertainty which until now have not been brought in. The existence of equilibrium is established directly—not just generically—and moreover under weaker assumptions on endowments than before, except that utility functions are taken to be concave. Agents do not need to start out with, or end up with, positive amounts of everything. With a single currency denominating the units of account in all states, price indeterminacy is avoided and all contracts issued in the financial markets can be interpreted as “real contracts.” Derivative instruments and collateralized contracts based on money prices are thereby encompassed for the first time. Transaction costs on sales of contracts, generated endogenously, lead to bid–ask spreads and in particular to a gap between interest rates for lending and borrowing money.

Keywords: General economic equilibrium; Incomplete markets; Retainability of goods; Derivatives and collateral; Transaction costs; Asset pricing; Variational inequality; Variational analysis (search for similar items in EconPapers)
JEL-codes: D52 D53 D58 D46 D81 E12 E41 E44 G13 C62 C68 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
http://link.springer.com/10.1007/s00199-016-1031-y Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:joecth:v:63:y:2017:i:1:d:10.1007_s00199-016-1031-y

Ordering information: This journal article can be ordered from
http://www.springer. ... eory/journal/199/PS2

Access Statistics for this article

Economic Theory is currently edited by Nichoals Yanneils

More articles in Economic Theory from Springer, Society for the Advancement of Economic Theory (SAET) Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla ().

 
Page updated 2019-05-21
Handle: RePEc:spr:joecth:v:63:y:2017:i:1:d:10.1007_s00199-016-1031-y