Summary
This paper examines the effects of extrinsic uncertainty or sunspots on competitive equilibrium when financial markets are incomplete. For the canonical two-period, pure-exchange model with bonds (or so-called “nominal assets”, yielding fixed overall returns specified in units of account, and including pure inside money), the following result is established: Generically in endowments, if there areS sunspot states in the second period, but only 0<I<S distinct types of bonds, then — corresponding to the inherent deficiency in the financial markets — sunspots will generateD=S−I dimensions of consumption allocation or real (as well as spot price or nominal) indeterminacy.
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Cass, D. Sunspots and incomplete financial markets: The general case. Econ Theory 2, 341–358 (1992). https://doi.org/10.1007/BF01211421
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DOI: https://doi.org/10.1007/BF01211421