Asset Markets and Equilibrium Processes

The failure of the asset market to be complete causes serial dependence in output and prices, which is suboptimal. We consider an economy with white noise shocks. When the asset market is complete, an optimal, competitive allocation inherits this strong stationarity. When the asset market is only sequentially complete, prices and output necessarily display serial dependence at equilibrium. The further incompleteness of a monetary economy explains co-movements in real and nominal variables.