INDIVIDUAL WELFARE, THE VOLATILITY OF PRICES, AND RATES OF RETURN ON NOMINAL ASSETS

Abstract

Within the framework of a stochastic version of the overlapping generations model a general choice theoretic portfolio approach is presented. Competitive equilibria are shown to be nonoptimal in a Pareto sense (and hence can potentially be improved by some policy action), if there exist two individuals of some generation t, such that the ratio of marginal utilities of future consumption is random. Finally, a short-run welfare criterion is provided, which is based on observable data only. The ordering induced by this criterion on the set of competitive equilibria is not complete, however.