A Simple Model of Useless Speculation

Murray C. Kemp, Hans-Werner Sinn

NBER Working Paper No. 3513
Issued in November 1990
NBER Program(s):   ITI   IFM

The paper presents a general equilibrium model of a pure exchange economy with stochastic endowment in which speculation is profitable and stabilizes prices, but is useless from a welfare point of view. Reconciling the Siegel paradox with the theory of incomplete markets we show that banning speculation by closing the forward exchange market may increase social welfare.

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Published: C and S working Paper , December 1995, Japanese Economic Review 51, (2000), pp. 85-95.

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