EQUITY, BONDS, GROWTH AND INFLATION IN A QUADRATIC INFINITE HORIZON ECONOMY

Martine Quinzii, Michael Magill and Julian R. Betts
Additional contact information
Julian R. Betts: Department of Economics, University of California Davis

No 112, Working Papers from University of California, Davis, Department of Economics

Abstract: This paper exhibits a class of infinite-horizon economies with incomplete markets (GEI) for which the equilibrium can be explicitly derived. We show that if agents have preference orderings represented by expected discounted quadratic utilities and if their endowments are tradable, then the equilibrium consumption and welfare of agents can be expressed as a function of the least variable income stream (LVI) obtainable by trading on the financial markets. If in addition the economy has a Markov structure, then the LVI can be calculated. The model is used to study the behavior of agents on the equity and bond markets in an economy in which the growth and inflation processes are calibrated to fit US data. Two related findings emerge: first, the proportion of bonds in the portfolios of even the most risk-averse agents is small (less than 2%); second, since equity dominates the portfolios of agents, the welfare loss due to variable inflation is small.

Pages: 39
Date: 2003-01-08
References: Add references at CitEc
Citations:

Downloads: (external link)
https://repec.dss.ucdavis.edu/files/kVgipuCVmycq3f764vUbd5jk/98-8.pdf (application/pdf)

Related works:
Working Paper: EQUITY, BONDS, GROWTH AND INFLATION IN A QUADRATIC INFINITE HORIZON ECONOMY
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:cda:wpaper:112

Access Statistics for this paper

More papers in Working Papers from University of California, Davis, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Letters and Science IT Services Unit ().