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Discussion Paper Details

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Title: Asset Prices, Debt Constraints and Inefficiency

Author(s): Gaetano Bloise and Pietro Reichlin

Publication Date: April 2008

Keyword(s): Asset Prices, Cass Criterion, Constrained Inefficiency, Default, Private debt and Solvency Constraints

Programme Area(s): International Macroeconomics

Abstract: In this paper, we consider economies with (possibly endogenous) solvency constraints under uncertainty. Constrained inefficiency corresponds to a feasible redistribution yielding a welfare improvement beginning from every contingency reached by the economy. A sort of Cass Criterion (Cass (1972)) completely characterizes constrained inefficiency. This criterion involves only observable prices and requires low interest rates in the long-run, exactly as in economies with overlapping generations. In addition, when quantitative limits to liabilities arise from participation constraints, a feasible welfare improvement, subject to participation, coincides with the introduced notion of constrained inefficiency.

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Bibliographic Reference

Bloise, G and Reichlin, P. 2008. 'Asset Prices, Debt Constraints and Inefficiency'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6779