Equilibrium in economies with financial markets: Uniqueness of expectations and indeterminacy

Abstract

We consider two-period, pure exchange economies with uncertainty and complete or incomplete asset markets. Assets are nominal. If the number of agents and of period-zero commodities is large enough, there is a dense, residual set of economies (parametrized by utility functions) such that, for each pair of distinct financial equilibria, spot zero equilibrium prices are different. Agents, observing first-period equilibrium prices, can formulate exact forecasts on future equilibrium prices, notwithstanding the real indeterminacy of the set of financial equilibria. If the asset market is complete, the result is true for an open and dense set of economies. Journal of Economic Literature classification numbers: D52, D80. © 1996 Academic Press, Inc.