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Nonconnectedness Of The Set Of Bankruptcy-Free Money Equilibria In The Static Economy: A Constructive Example

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  • Kang, Minwook

Abstract

A static economy in which nominal taxes and transfers are balanced, as proposed by Balasko and Shell (1993), typically has a continuum of equilibrium money prices. This paper presents a constructive example in which the set of equilibrium money prices is not connected. By allowing negative consumption as a mathematical construct, closed form solutions for equilibrium tax-adjusted income are derived. The main result of the example implies that bankrupt taxpayers with negative tax-adjusted income can be free from bankruptcy as the price of money increases. This paradoxical outcome is similar to that of the transfer paradox, as suggested by Gale (1974), where tax-transfer plans make taxpayers better off.

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  • Kang, Minwook, 2014. "Nonconnectedness Of The Set Of Bankruptcy-Free Money Equilibria In The Static Economy: A Constructive Example," Macroeconomic Dynamics, Cambridge University Press, vol. 18(7), pages 1539-1546, October.
    • Handle: RePEc:cup:macdyn:v:18:y:2014:i:07:p:1539-1546_00
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    Cited by:

    1. Ram Sewak Dubey & Minwook Kang, 2019. "Transfer paradox in a stable equilibrium," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(2), pages 259-269, December.
    2. Minwook KANG, 2015. "A Concrete Example of the Transfer Problem with Multiple Equilibria," Economic Growth Centre Working Paper Series 1504, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.

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