Working Paper

Rational expectations equilibrium in an economy with segmented capital asset markets

Abstract: We develop a model of noisy rational expectations equilibrium in segmented markets. The noise emerges endogenously through intermarket effects rather than through exogenous supply noise from liquidity or naive trading as in standard noisy rational expectations equilibrium of the Hellwig type. Existence of and persistence of segmentation in equilibrium is established. A metric to determine welfare effects of the degree of segmentation is also derived. This metric is structurally different from the metric derived in the standard models and includes the latter as a special case. Empirical evidence from and observed characteristics of \"real world\" economies that support the economic intuition underlying the model are described in some detail.

Keywords: Capital market;

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Bibliographic Information

Provider: Federal Reserve Bank of Atlanta

Part of Series: FRB Atlanta Working Paper

Publication Date: 1995

Number: 95-16