THE ROLE OF FISCAL-POLICY IN AN INCOMPLETE MARKETS FRAMEWORK

A general-equilibrium model is developed to highlight the link between neo-Keynesian models of unemployment and recent results on the constr ained sub-optimality of competitive economies with incomplete asset ma rkets. Although the model deviates from the Arrow-Debreu paradigm only by the absence of some contingent claims, the competitive equilibrium exhibits under-employment and balanced-budget fiscal policies have Ke ynesian effects which are Pareto improving.