Money and market incompleteness in overlapping generations models

Abstract

This paper investigates the extent to which the character of equilibria in stochastic overlapping generations models stems from the model's generic market incompleteness. In addition, it addreses the question of whether money serves to complete markets in these models. We show that money does not complete markets in the sense of expanding the set of state-contingent commodities that an individual may trade. The introduction of money effects state-contingent transfers of wealth between individuals; this is a generalization of a result obtained by Marshall, Sonstelie, and Gilles (1987). Numerical simulation of the model suggests that the risk-sharing induced in the monetary economy leads to substantial increases in welfare levels relative to the nonmonetary economy.