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Generic determinacy and money non-neutrality of international monetary equilibria

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  • Tsomocos, Dimitrios P.

Abstract

I address the issue of the [`]number' of international monetary equilibria that the international finance model of Geanakoplos and Tsomocos (2002) possesses. The mainstream competitive model has locally unique equilibria with respect to the real side of the economy; however, it manifests nominal indeterminacy. Kareken and Wallace [Kareken, J., Wallace, N., 1981. On the Indeterminacy of Equilibrium Exchange Rates. Q. J. Econ. 96, 207-222] extend the O.L.G. indeterminacy result to a monetary model of the international economy. However, the role of monetary sector together with the market and agent heterogeneity remove real and nominal indeterminacy in the Geanakoplos and Tsomocos model. In particular, nominal indeterminacy abruptly disappears when private liquid wealth is non-zero. Finally, monetary policy becomes non-neutral since monetary changes affect nominal variables which in turn determine different real allocations. Lucas did not find these non-neutral effects in his model of international finance because he postulated a [`]sell-all model' in which every agent sells everything he owns in every period. Thus, the number of transactions remain unaffected by definition regardless of any policy changes. Instead, when transactions emerge endogenously in equilibrium monetary policy has non-neutral effects provided that there exist potential gains to trade at the initial allocation of goods.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 44 (2008)
Issue (Month): 7-8 (July)
Pages: 866-887

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Handle: RePEc:eee:mateco:v:44:y:2008:i:7-8:p:866-887

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  1. Grandmont, Jean-Michel & Younes, Yves, 1972. "On the Role of Money and the Existence of a Monetary Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 39(3), pages 355-72, July.
  2. Debreu, Gerard, 1970. "Economies with a Finite Set of Equilibria," Econometrica, Econometric Society, vol. 38(3), pages 387-92, May.
  3. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  4. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
  5. Pradeep Dubey & John Geanakoplos, 2003. "Monetary Equilibrium with Missing Markets," Cowles Foundation Discussion Papers 1389, Cowles Foundation for Research in Economics, Yale University.
  6. John Geanakoplos & Andreu Mas-Colell, 1985. "Real Indeterminacy with Financial Assets," Cowles Foundation Discussion Papers 770R, Cowles Foundation for Research in Economics, Yale University, revised Oct 1985.
  7. Geanakoplos, J. D. & Tsomocos, D. P., 2002. "International finance in general equilibrium," Research in Economics, Elsevier, vol. 56(1), pages 85-142, June.
  8. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
  9. Dimitrios P. Tsomocos & Martin Shubik, 2002. "A strategic market game with seigniorage costs of Fiat money," Economic Theory, Springer, vol. 19(1), pages 187-201.
  10. Kareken, John & Wallace, Neil, 1981. "On the Indeterminacy of Equilibrium Exchange Rates," The Quarterly Journal of Economics, MIT Press, vol. 96(2), pages 207-22, May.
  11. Robert E. Lucas, Jr. & Nancy L. Stokey, 1985. "Money and Interest in a Cash-in-Advance Economy," NBER Working Papers 1618, National Bureau of Economic Research, Inc.
  12. Shapley, Lloyd S & Shubik, Martin, 1977. "Trade Using One Commodity as a Means of Payment," Journal of Political Economy, University of Chicago Press, vol. 85(5), pages 937-68, October.
  13. Lucas, Robert E., 1984. "Money in a theory of finance," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 21(1), pages 9-46, January.
  14. Geanakoplos, J D & Polemarchakis, H M, 1986. "Walrasian Indeterminacy and Keynesian Macroeconomics," Review of Economic Studies, Wiley Blackwell, vol. 53(5), pages 755-79, October.
  15. Dubey, Pradeep & Geanakoplos, John, 2003. "Monetary equilibrium with missing markets," Journal of Mathematical Economics, Elsevier, vol. 39(5-6), pages 585-618, July.
  16. Gaetano Bloise & Herakles Polemarchakis, 2006. "Theory and practice of monetary policy," Economic Theory, Springer, vol. 27(1), pages 1-23, 01.
  17. GRANDMONT, Jean-Michel & LAROQUE, Guy, . "On money and banking," CORE Discussion Papers RP -215, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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Cited by:
  1. Charles A. E. Goodhart & Carolina Osorio & Dimitrios P. Tsomocos, 2009. "Analysis of Monetary Policy and Financial Stability: A New Paradigm," CESifo Working Paper Series 2885, CESifo Group Munich.
  2. Raphael A. Espinoza & Dimitrios P. Tsomocos, 2008. "Liquidity and Asset Prices," Economics Series Working Papers 2008fe28, University of Oxford, Department of Economics.
  3. Raphaël Espinoza & Charles. Goodhart & Dimitrios Tsomocos, 2009. "State prices, liquidity, and default," Economic Theory, Springer, vol. 39(2), pages 177-194, May.
  4. repec:hal:cesptp:halshs-00505141 is not listed on IDEAS
  5. Gaël Giraud & Dimitrios P. Tsomocos, 2010. "Nominal Uniqueness and Money Non-neutrality in the Limit-Price Exchange Process," Documents de travail du Centre d'Economie de la Sorbonne 10061, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.

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