Allocative Effects of Financial Assets and the Long Run Neutrality of Money when Markets are Incomplete

We analyze the allocative role of money as a numeraire in an intertemporal general equilibrium model with incomplete financial markets and nominal financial instruments. It is shown that regardless of their return specification nominal assets in net supply increase the consumption risk and trigger an endogenous monetary process which diminishes the influence of these assets on the equilibrium allocation through time. The nonneutrality of money claimed in the recent literature is a temporary phenomenon only. Asymptotically, the traditional neutrality theorems are valid.