Keywords: Money, asset pricing, dynamic programming, stochastic modelling, uncertainty
Abstract: This paper analyzes the necessary and sufficient conditions for solving money-in-the-utility-function
models when contemporaneous asset returns are uncertain. A unique solution to such models is shown
to exist under certain measurability conditions. Stochastic Euler equations, whose existence is
normally assumed in these models, are then formally derived. The regularity conditions are weak, and
economically innocuous. The results apply to the broad range of discrete-time monetary and financial
models that are special cases of the model used in this paper. The method is also applicable to
other dynamic models that incorporate contemporaneous uncertainty.
Full paper (311 KB PDF)
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Last update: December 3, 2005