The rapidly growing field called ‘general equilibrium with incomplete markets’ (GEI) has already made fundamental contributions in three different areas of economic theory. First, it has thrown up math ematical problems so delicate that they have forced economists for the first time to abandon that old war-horse—Brouwer’s fixed point theorem—and to invent (or borrow from mathematics) a new methodology for constructing existence proofs for general equilib rium. Second, it has demonstrated a significant difference between real and financial assets. Third, it has, to my mind, greatly increased the presumption against Pareto efficiency of the market process. The model appears to be flexible and rich enough to include many of the fundamental paradigms of finance and macroeconomics.
KeywordsGeneral Equilibrium Financial Asset Incomplete Market Pareto Efficiency Perfect Competition
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