the structure of financial equilibrium with exogenous yields the case of incomplete markets1 this paper presents an analysis of the structure of competitive equilibrium in a model whose principal feature is incomplete financial markets formulated in the spirit of arrow specifically the overall payoffs or returns from financial instruments are assumed to be fixed or predetermined independently of the operation of the economy and these instruments are assumed to be fewer in number than required to span all potential spot markets for commodities our main result establishes that market incompleteness generates a corresponding degree of allocation indeterminateness suppose there are n 1 spot markets but only 0 m n linearly independent financial instruments so that the deficiency in financial markets is 0 n n m n then subject to some relatively innocuous technical qualifications the set of equilibrium allocations contains a smooth n dimensional submanifold we also indicate how real indeterminacy may increase when returns for example the market price and promised interest on an ordinary bond are treated as variables rather than parameters

equilibrium policy in an overlapping generations economy abstract this paper offers a mechanism for reducing the number of stationary equilibria that arise in a simple two period lived overlapping generations economy since each equilibrium is associated with a different combination of monetary and fiscal policies i assume that at each date the agent in his second period of life determines how that period s monetary and fiscal instruments will be set i show that the set of stationary equilibria where this occurs is a proper and nonempty subset of the set of stationary competitive equilibria and that at least one such equilibrium is a pareto optimum

interruptible electric power service contracts abstract a two period model is considered in period 1 the electric power company offers for sale a set of contracts 1 p 1 2 p 2 each consumer must select one contract k and d units of energy for which she pays p k d the company must deliver d units of energy in period 2 with probability k the service may be interrupted with the complementary probability 1 k the problem is to design the optimal set of contracts to maximize social welfare when demand and supply may be random and when customers suffer a welfare loss due to service interruption the best design is shown to be a solution to an optimal control problem the results contrast sharply with previous work on the problem of pricing electric power in the face of random supply or demand

supply management with intermittent trade disruptions when the probabilities are not fully known abstract previous studies of trade disruptions have assumed that the probabilistic transition rates between normal and disrupted markets are known this may be unreasonable if disruptions occur infrequently in this paper a bayesian procedure for estimating the transition rates is derived under the assumption that the transition processes are exogenous and poisson the procedure is applied to the problem of managing emergency reserves in an import dependent economy time consistent plans for consuming and replenishing reserves are derived optimal reserves are found to be generally larger than if the transition rates were known and equal to current expected values

allocative effects of financial assets and the long run neutrality of money when markets are incomplete abstract we analyze the allocative role of money as a numeraire in an intertemporal general equilibrium model with incomplete financial markets and nominal financial instruments it is shown that regardless of their return specification nominal assets in net supply increase the consumption risk and trigger an endogenous monetary process which diminishes the influence of these assets on the equilibrium allocation through time the nonneutrality of money claimed in the recent literature is a temporary phenomenon only asymptotically the traditional neutrality theorems are valid

efficiency improvement from restricting the liquidity of nominal bonds abstract in a monetary search model with nominal bonds agents face matching taste shocks but they cannot insure borrow or trade against such shocks a government imposes a legal restriction that prohibits bonds from being used to buy a subset of goods i show that this legal restriction can increase the society s welfare in contrast to the literature this efficiency role persists in the steady state and even when the households cannot trade assets after receiving the shocks moreover it can exist when the friedman rule is available and when the restriction is only obeyed by government agents

assets general equilibrium and the neutrality of money when government liabilities including money are held in private portfolios only as stores of value and do not provide additional services such as liquidity real variables are not affected by changes in the money supply due to the government s trading in real assets open market operations this neutrality of monetary policy fails if the government either trades in nominal assets or it distributes subsidies and levies taxes the ability of monetary policy to affect real variables is an important issue and has been the subject of numerous theoretical and empirical studies the most useful theoretical framework within which to address the problem is a model of asset markets where the demand for money or other government liabilities is determined by rational portfolio choice tobin 1958 these assets may of course provide additional services such as transactions and liquidity we assume here however that these services do not exist the standard argument for the effectiveness of monetary policy goes as follows changes in the supply of money affect the price level and hence the distribution of returns to money as an asset as individuals realign their portfolios and prices adjust to maintain market clearing the equilibrium holdings of physical assets change in this case money is not neutral we shall argue however that as long as changes in the supply of money are effected through the government s trading in real assets this argument is in general not valid it is well known that the effectiveness of monetary policy depends on the method of injection of new money into the economy two procedures are used by the government to effect changes in the supply of money it either trades in assets nominal or real open market operations or it distributes subsidies and levies taxes we show here that open market operations in real assets capital or indexed bonds have no effects on real variables in a general equilibrium model with market clearing the argument which can also be applied to the management of the public debt is presented in a most general framework in the next section it does not depend on the existence of a complete system of contingent securities or on an operative bequest motive furthermore it is compatible with incomplete and differential information the result is similar to the modigliani miller theorem in corporate finance that an argument along these lines can be employed to demonstrate the irrelevance of open

to be unionized or not to be a case for cost raising strategies under cournot oligopoly abstract this paper analyses the decision by firms under cournot oligopoly as to recognize unions in order to gain market power despite higher costs considering classical models of union firm bargaining namely right to manage rtm and efficient bargaining eb we show that for a sufficiently low level of union power eb firms might adopt cost raising strategies this theoretical prediction is compatible with some empirical evidence in favour of eb and adds to the theoretical finding that eb might dominate rtm under unionized cournot nash oligopoly it also suggests closer antitrust scrutiny as whether unions can provide cartel like services to oligopoly firms allowing them to distort product market competition at the expense of consumers

price adjustment within a framework of symmetric oligopoly this paper is concerned with the generation and testing of predictions on price adjustment from a model of symmetric oligopoly two types of industry demand regimes are considered linear and iso elastic it is shown that these can be distinguished by a simple test and linear demand is given strong support it is then shown that the industry conjectural variation may be treated as a function whose properties can be established by non linear estimation of the price adjustment equation

the relevance of financial policy when the asset market is incomplete equilibrium allocations are not invariant to changes in the financial policies of firms in the presence of secondary assets such as options whose payoffs depend nonlinearly on the price of equity the range of attainable reallocations of revenue varies as a firm alters its position in the asset market corporate financial policy is thus relevant when assets are nominal monetary policy implemented through open market operations is also effective

a price discrimination analysis of monetary policy monetary policy is analysed within a model that appeals to legal restrictions on private intermediation to explain the coexistence of currency and interest bearing default free bonds the interaction between such legal restrictions and monetary policy is illustrated in a version of the overlapping generations model the model shows that legal restrictions and the use of both currency and bonds permit the government to levy a nonlinear inflation tax and that such a tax may be better in terms of the pareto criterion than a linear inflation tax

stochastic inflation and government provision of indexed bonds abstract this paper examines the consequences of using indexed bonds as one of the government financing instruments along with money and taxes it is shown that open market operations between money and indexed bonds do not matter in a real sense despite their different risk characteristics increasing the share of indexed bonds in the government portfolio increases the volatility and the conditional mean of real rates of return on money when provided by means other than open market operations indexed bonds can affect the allocation of resources but these reallocations cannot be pareto improving

real indeterminacy with financial assets abstract it is shown that in a two period general equilibrium securities model where assets pay in money the generic dimension of the set of equilibrium allocations in the incomplete market situation is s 1 where s is the number of assets hence the degree or real indeterminacy is independent of the number of assets this result requires beyond fewer assets than states that the number of traders be larger than the number of securities and that the asset return matrix be in general position the generic dimension for arbitrary returns matrix is also obtained it is argued in addition that the presence of real or mixed assets does not by itself lower the degree of indeterminacy

the liquidity services of money this paper investigates the liquidity services provided by cash interest bearing check balances and securities which pay higher interest than checks securities must be traded before con sumers know their desired level or composition of consumption cash a nd checks are more liquid since they are available on demand cas h is more liquid than checks since it is more widely useable as a medium of exchange cash will often be used to buy goods which could be bought by check and the demand for cash will be less sensitive t han the demand for checks to the interest paid on check balances copyright 1988 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

embargo threats and the management of emergency reserves this paper develops a model of a country that can import oil in normal times but is subject to random trade disruptions to mitigate the effects of these disruptions some of the imported oil is stockpiled there are two kinds of uncertainty involved the date at which an embargo will be imposed is not known in advance and given that an embargo has been imposed the date at which it will end is uncertain optimal behavior is analyzed by means of dynamic programming 13 references

the welfare effects of intermittent interruptions of trade consider the problem of a buyer purchasing a costlessly storable good at a fixed price under threat of interruption of trade suppose there are two distinct and exhaustive regimes either one can buy as much as desired at the going price or one can purchase nothing at all and must rely on accumulated stocks for consumption the market moves randomly over time between these two states which will be referred to here as on and off respectively given the stochastic process governing the evolution of market regimes the price faced when the market is on and the intertemporal preferences of the buyer one may inquire as to the optimal acquisition rate for storage and consumption when the market is on and the optimal usage of accumulated stocks when the market is off solutions for these problems could then be used to ascertain the degree to which buyer and seller welfare is affected by the probabilistic curtailment of trading opportunities and the willingness to pay of the buyer for greater security of supply as well the possibility of inferring from purchase and storage behavior the buyer s perception of the likelihood and duration of trade interruptions may be explored this paper presents a general solution to this problem for stationary environments that is assuming intertemporal preferences to be representable by the expected present value of a uniformly discounted time independent flow utility function and taking the stochastic process governing change in regimes to be stationary markov optimal behavior and associated expected discounted utility are derived the method employed adapts to this context the dynamic programming arguments of my 1981 paper and is similar in structure to that employed in the analysis of resource depletion with technological uncertainty in partha dasgupta and geoffrey heal 1974 and dasgupta and joseph stiglitz 1981 there are many industrial markets in which these considerations are important recent events in the world oil market have stimulated much interest in the study of strategic mineral reserves see for example thomas teisberg 1981 in markets where demand fluctuates randomly and prices are inflexible for example the industrial market for natural gas the possibility of stochastic rationing has important implications for firm behavior see dennis carleton 1978 the prospect of strike upstream or lag in the delivery of goods on order has significant implications for inventory holdings in some industries the framework of this paper may even be adapted to the study of labor supply and savings behavior over the life cycle for a worker facing intermittent and uncertain unemployment

legal restrictions sunspots and cycles abstract an economy in which legal restrictions prevent private agents from issuing close substitutes for money is examined specifically in a model with borrowing and lending agents are prevented from acquiring privately issued liabilities in amounts smaller than some minimum dollar denomination an economy is then constructed which has no sunspot equilibria absent such a restriction in the presence of the restriction however conditions sufficient to rule out equilibrium 2 cycles also imply the existence of stationary sunspot equilibria this is the case even though all agents have savings functions that are non decreasing in relevant rates of return

asset pricing and the role of money in an intergenerational economy this note is an attempt to check the robustness of money in the utility function miuf models the parametrization of the utility of money is an ad hoc constraint on the economic model which does not reveal its underlying relation to the parameters of the environment such as tastes technology and endowments from which it arises in particular the various parametrizations do not suggest any interpretation in terms of different roles for money in the exchange process it thus appears that the usefulness of miuf models in economic theory depends critically on the issue of whether or not their qualitative properties are sensitive to the specification of money in the utility function we show that important qualitative conclusions hinge critically on the time specification of the monetary variables which are included in the utility function in particular the ability of common stocks to provide protection against inflation resulting from monetary and real shocks respectively depends sensitively on the way the liquidity services of money are parametrized in the individual preferences

interest rates in a credit constrained economy when households face credit constraints in an economy with inside as well as outside money stationary equilibrium real interest rates are below the household rate of time preference they also depend significantly upon household risk aversion the demand for inside versus outside money bank costs bank reserves inflation and the marginal productivity of capital and capital depreciation rates in addition changes in financial variables affect per capita capital and output to a greater extent when households are credit constrained copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association