Abstract
Recent work on general equilibrium models with incomplete financial markets has demonstrated that when assets pay off in units of account, equilibrium prices and allocations are indeterminate. The equilibria in such models are also generically constrained suboptimal. A central planner can typically reallocate assets in such a way as to Pareto dominate the competitive equilibrium. In this paper, the authors consider an overlapping generations model with incomplete markets in which one asset is fiat money. They show that when outside money has value in equilibrium, the stationary equilibrium prices and allocations are both locally isolated and constrained optimal. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
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