Limited Participation, Nominal Volatility, and Risk Sharing: Monetary Union and Financial Development

54 Pages Posted: 15 May 2006

See all articles by Alejandro Gaytan

Alejandro Gaytan

Banco de Mexico, Macrofinancial Analysis Division

Date Written: March 2005

Abstract

This paper explores the effects of nominal volatility and limited participation in asset markets on the risk sharing possibilities available to agents. When the set of financial assets is a decision of agents and is constrained by the resources available for investment, limited participation and nominal volatility can generate an inefficiently small number of financial assets. A monetary rule, such as a fixed exchange rate or monetary union, that reduces nominal volatility can foster the development of stock markets by increasing the number of equity securities. However, the welfare benefits and costs of a monetary union are asymmetrically distributed both across groups with different access to financial markets and across countries.

Keywords: financial development, incomplete markets, nominal volatility, inflation, monetary union

JEL Classification: E31, E42, F36, F42, G15

Suggested Citation

Gaytan, Alejandro, Limited Participation, Nominal Volatility, and Risk Sharing: Monetary Union and Financial Development (March 2005). Available at SSRN: https://ssrn.com/abstract=901461 or http://dx.doi.org/10.2139/ssrn.901461

Alejandro Gaytan (Contact Author)

Banco de Mexico, Macrofinancial Analysis Division ( email )

5 de mayo 18, 5th floor,
Col. Centro
Mexico City, 06059 D.F. 06059
Mexico
(5255) 5237 2611 (Phone)
(5255) 5237 2687 (Fax)

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