In this paper we show that competitive equilibrium prices and margin requirements naturally lead to too much leverage relative to the constrained optimum. We describe two mechanisms through which equilibrium forces lead agents to borrow too much and to hold too little collateral. To illustrate...

In this paper we present circumstances under which the possibility of high leverage can lead to widespread default and national crises. In models with incomplete markets, default and production, there will almost always be a mismatch between firm output across states of nature and asset...

During a crisis, developing countries regret having issued dollar denominated debt because they have to pay more when they have less. Ex ante, however, they may be worse off issuing local currency debt because the equilibrium interest rate might rise, making it more expensive for them to borrow....

The competitive equilibrium correspondence, which associates equilibrium prices of commodities and assets with allocations of endowments, identifies the preferences and beliefs of individuals; this is the case even if the asset market is incomplete.

This paper studies an overlapping generations model with stochastic production and incomplete markets to assess whether the introduction of an unfunded social security system leads to a Pareto improvement. When returns to capital and wages are imperfectly correlated a system that endows retired...

In this paper we argue that in realistically calibrated two period general equilibrium models with incomplete markets CAPM-pricing provides a good benchmark for equilibrium prices even when agents are not mean-variance optimizers and returns are not normally distributed. We numerically...

The competitive equilibrium correspondence, which associates equilibrium prices of commodities and assets with allocations of endowments, identifies the preferences and beliefs of individuals under uncertainty; this is the case even if the asset market is incomplete.

The competitive equilibrium correspondence, which associates equilibrium prices of commodities ans assets with allocations of endowments, identifies the preferences and beliefs of individuals, this is the case even if the asset market is incomplete.

The competitive equilibrium correspondence, which associates equilibrium prices of commodities and assets with allocations of endowments, identifies the preferences and beliefs of individals also under uncertainty; this is the case even if the asset market is incomplete.