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Seoul Journal of Economics - Vol. 15 , No. 3
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Seoul Journal of Economics - Vol. 15, No. 3, pp. 369-393
Abbreviation: SJE
ISSN: 1225-0279 (Print)
Print publication date 31 Aug 2002
Received 11 Dec 2002 Revised 24 Jan 2003

Welfare of Incomplete Markets Economy with Permanent as well as Transitory Shocks
Jinill Kim
Economist, Division of Monetar Affairs, Federal Reserve Board, Wahsington DC 20551, U.S.A, Tel: +1-202-452-2981 (Jinill.Kim@frb.gov)

JEL Classification: F4l, D52

Abstract

Under the assumption that shocks are transitory, the welfare properties of the incomplete markets economy with only bonds are well known. As agents become more patient, its behavior get closer to that of the complete markets economy. As shocks become more persistent, the incomplete markets economy behave much differently from the complete markets economy. This paper shows that, when shocks have permanent as well as transitory components, neither of these two properties is true. More patience does not always move the incomplete markets economy closer to the complete markets economy, and more persistence in growth rate shocks induces similarity between the incomplete markets economy and the complete markets economy.

Keywords: Incomplete markets, Welfare, Permanent shocks, Transitory shocks
Acknowledgments

Prepared for the presentation at Seoul Journal of Economics special lecture series on December 11, 2002. Comments from Craig Burnside, Eric van Wincoop, and seminar participants at the University of Virginia, Sogang University, and Seoul National University are appreciated. This paper relies heavily on discussions with Sunghyun Henry Kim and Andrew Levin.

The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of any other person associated with the Federal Reserve System.

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