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On imperfect competition with occasionally binding cash-in-advance constraints

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  • Dixon, Huw
  • Pourpourides, Panayiotis M.

Abstract

We provide a theoretical demonstration of the link between imperfect competition and the cash-in-advance constraint, not previously considered in the literature. In a general equilibrium framework, we show that imperfect competition affects the proportion of times that the cash-in-advance constraint binds. As the market becomes more competitive it is certainly no less likely that the cash-in-advance constraint will bind. Therefore, economic welfare changes not only because of the direct effect of the change in the distribution of aggregate consumption but also because of the indirect effect of the cash-in-advance constraint. Other implications are also demonstrated.

Suggested Citation

  • Dixon, Huw & Pourpourides, Panayiotis M., 2016. "On imperfect competition with occasionally binding cash-in-advance constraints," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 72-85.
    • Handle: RePEc:eee:jmacro:v:50:y:2016:i:c:p:72-85
    DOI: 10.1016/j.jmacro.2016.09.002
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    Cited by:

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    2. Jonathan Swarbrick, 2021. "Occasionally Binding Constraints in Large Models: A Review of Solution Methods," Discussion Papers 2021-5, Bank of Canada.

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    More about this item

    Keywords

    Cash-in-advance; General equilibrium; Monopolistic competition; Imperfect competition; Money velocity;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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