THE STRUCTURE OF FINANCIAL EQUILIBRIUM WITH EXOGENOUS YIELDS - THE CASE OF RESTRICTED PARTICIPATION

We analyze the competitive equilibria in a model in which there are two periods, with uncertainty in the second, and households exchange both physical commodities and financial instruments - or current and future credit - on the spot market in the first period. Future returns from the financial instruments are fixed in terms of units of account (exogenous yields), and households face linear homogeneous constraints on their opportunities for transacting in financial instruments (restricted participation). Our main result establishes that if enough households are subject to the same constraints on exchanging credit, then restricted participation leads to a degree of real indeterminacy comparable to that obtaining in a model where there are simply too few available financial instruments (incomplete markets). © 1990.