On the welfare role of redundant assets with heterogenous forecasts

• Main Authors: CHATTERJI, Shurojit, KAJII, Atsushi
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2023
• Subjects: Economic Theory
• Online Access: https://ink.library.smu.edu.sg/soe_research/2716; https://ink.library.smu.edu.sg/context/soe_research/article/3715/viewcontent/cb_wp046__1_.pdf
• Institution: Singapore Management University

We study a multiperiod model with a nominal bond that matures in one period and identify the set of e¢ cient allocations that can be sustained as Walrasian equilibria with heterogeneous forecasts. We next add a long maturity bond, which under perfect foresight would be a redundant asset, and show that it fundamentally expands the set of e¢ cient allocations that can be sustained as Walrasian equilibria. Indeed all wealth transfers compatible with e¢ ciency can arise endogenously. The key feature driving this conclusion are forecasting errors, which lead to ex post arbitrage opportunities that induce these income transfers.