Equity, Bonds, Growth and Inflation in a Quadratic Infinite Horizon Economy

UC Davis Working Paper No. 98-08

Posted: 2 Jun 1998

See all articles by Michael J. P. Magill

Michael J. P. Magill

University of Southern California - Department of Economics

Martine Quinzii

University of California, Davis - Department of Economics

Date Written: May 1998

Abstract

This paper exhibits a class of infinite-horizon economies with incomplete markets (GEI) for which the equilibrium can be explicitly derived. We show that if agents have preference orderings represented by expected discounted quadratic utilities and if their endowments are tradable, then the equilibrium consumption and welfare of agents can be expressed as a function of the least variable income stream (LVI) obtainable by trading on the financial markets. If in addition the economy has a Markov structure, then the LVI can be calculated. The model is used to study the behavior of agents on the equity and bond markets in an economy in which the growth and inflation processes are calibrated to fit U.S. data. Two related findings emerge: first, the proportion of bonds in the portfolios of even the most risk-averse agents is small (less than 2%); second, since equity dominates the portfolios of agents, the welfare loss due to variable inflation is small.

JEL Classification: D52, D58, D90, G10

Suggested Citation

Magill, Michael J. P. and Quinzii, Martine, Equity, Bonds, Growth and Inflation in a Quadratic Infinite Horizon Economy (May 1998). UC Davis Working Paper No. 98-08. Available at SSRN: https://ssrn.com/abstract=94139

Michael J. P. Magill (Contact Author)

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States
213-740-2104 (Phone)
213-740-8543 (Fax)

Martine Quinzii

University of California, Davis - Department of Economics ( email )

One Shields Drive
Davis, CA 95616-8578
United States
530-752-1567 (Phone)
530-752-9382 (Fax)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
585
PlumX Metrics