DP6779 Asset Prices, Debt Constraints and Inefficiency
|Author(s):||Gaetano Bloise, Pietro Reichlin|
|Publication Date:||April 2008|
|Keyword(s):||Asset Prices, Cass Criterion, Constrained Inefficiency, Default, Private debt, Solvency Constraints|
|JEL(s):||D50, D52, D61, E44, G13|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=6779|
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.