Gaetano Bloise

Asset Prices, Debt Constraints and Inefficiency

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.

Money and Indeterminacy over an Infinite Horizon

Money provides liquidity services through a cash-in-advance constraint. The exchange of commodities and assets extends over an infinite horizon under uncertainty and complete asset market. Monetary policy sets the path of rates of interest and accommodates the demand for balances. Competitive equilibria exist. But, for a fixed path of rates of interest, there is a non-trivial multiplicity of equilibrium paths of prices of commodities. Determinacy requires that, subject to no-artibrage and in addition to rates of interest, the prices of state-contingent revenues be somehow determined.

An Obtrusive Remark on Capital and Comparative Statics

We present a simple comparative statics analysis of steady-state equilibria in overlapping generations economies with capital accumulation. We regard comparative statics as paradoxical whenever an exogenous increase in saving propensity induces a decrease (an increase) in consumption at the steady state when interest rate is positive (negative). It is shown that there is an exact relation between paradoxical comparative statics and a perverse intersection of properly identified curves of demand for and supply of capital in value. The demand curve for capital in value coincides with that of neo-Ricardian analysis. We relate our conclusions to some old and recent issues in capital theory.

Efficiency and Prices in Economies of Overlapping Generations

In a general economy of overlapping generations, I introduce a notion of uniform ine±ciency, corresponding to the occurrence of a Pareto improvement with a small uniform destruction of resources (Debreu [11]). I provide necessary and su±cient conditions for uniform ine±ciency in terms of competitive equilibrium prices. Minimal assumptions are needed for such a complete characterization; moreover, proofs reduce to simple and short direct arguments. Finally, I verify that uniform ine±ciency is preserved under perturbations of the endowments, a property that has not been established for the canonical notion of ine±ciency. Remarkably, an allocation is unifo

Convex dynamic programming with (bounded) recursive utility

We consider convex dynamic programs with general (bounded) recursive utilities. The Contraction Mapping Theorem fails when the utility aggregator does not obey any discounting property. This failure occurs even with traditional aggregators and certainty equivalent specifications. However, the Bellman operator admits a unique fixed point when an interior policy is feasible. This happens because utility values are unique at interior consumption plans and, when an interior perturbation is feasible, drops in utility values can be avoided.

Sovereign debt and incentives to default with uninsurable risks

We show that sovereign debt is unsustainable if debt contracts are not supported by direct sanctions and default carries only a ban from ever borrowing in financial markets even in the presence of uninsurable risks and time-varying interest rate. This extension of Bulow and Rogoff (1989) requires that the present value of the endowment be finite under the most optimistic valuation. We provide examples where this condition fails and sovereign debt is sustained by the threat of loss of insurance opportunities upon default, despite the fact that the most pessimistic valuation of the endowment, the natural debt limit, is finite.

An argument for positive nominal interest

In a dynamic economy, money provides liquidity as a medium of exchange. A central bank that sets the nominal rate of interest and distributes its profit to shareholders as dividends is traded in the asset market. A nominal rates of interest that tend to zero, but do not vanish, eliminate equilibrium allocations that do not converge to a Pareto optimal allocation.

Inflation and Welfare in an OLG Economy with a Privately Provided Public Good

In this paper we study the welfare effects of monetary policy in a simple overlapping generation economy in which agents voluntarily contribute to a public good. Inflation has two effects at equilibrium: it increases voluntary contributions and it misallocates private consumption across time. We show that the aggregate effect is welfare-improving for not too large inflation rates. Moreover, there exists an optimal inflation rate.