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The Analysis Of Model Of General Economic Equilibrium And Financial Instability Of Economic System

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  • Marko Backovic
  • Zoran Popovic
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    Abstract

    The model of the economic system which is discussed in this paper is based on the assumption of the existence of the heterogeneous structure of economic agents. During this assumption, we analyze the general economic equilibrium model with incomplete asset market, the existence of monetary equilibrium and the emergence of financial instability of the economic system, as well as actions that are necessary for overcoming economic instability. The private sector is observed as a set of participants who have different utility functions. Also, it is assumed that there are more commercial banks, where each bank has their own portfolios, which reflect the different preferences the risk / profit. In the market conditions, each bank analyzes the credit worthiness of each borrower, and on the other side each borrower faces different credit markets. Therefore, in this paper, instead of the only market for deposits/loans, development of model will be conducted by analyzing more than one market for deposits and more than one market for loans. The private sector and commercial banks maximize their utility functions, while the role of the Central Bank and the public sector is exogenously given. Further, in the model, we look at money as the conditioned medium of exchange, whereby the Central Bank and the government have a monopoly on the issue of controlled money as a widely accepted method of payment. Also, depending on what is the function of money in the markets funds, we observe the same physical structure as endogenous or exogenous size.

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    Bibliographic Info

    Article provided by Economic Laboratory for Transition Research (ELIT) in its journal Montenegrin Journal of Economics.

    Volume (Year): 8 (2012)
    Issue (Month): 1 ()
    Pages: 63-85

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    Handle: RePEc:mje:mjejnl:v:8:y:2012:i:1:p:63-85

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    1. DREZE, Jacques H. & POLEMARCHAKIS, Heracles M., 1998. "Intertemporal general equilibrium and monetary theory," CORE Discussion Papers 1998053, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Gaetano Bloise & Jacques Dréze & Herakles Polemarchakis, 2005. "Monetary equilibria over an infinite horizon," Economic Theory, Springer, vol. 25(1), pages 51-74, 01.
    3. P. Jean-Jacques Herings & Heracles M. Polemarchakis, 1999. "Pareto Improving Price Regulation When the Asset Market Is Incomplete," Cowles Foundation Discussion Papers 1210, Cowles Foundation for Research in Economics, Yale University.
    4. Cass, David & Siconolfi, Paolo & Villanacci, Antonio, 2001. "Generic regularity of competitive equilibria with restricted participation," Journal of Mathematical Economics, Elsevier, vol. 36(1), pages 61-76, September.
    5. Mas-Colell,Andreu, 1990. "The Theory of General Economic Equilibrium," Cambridge Books, Cambridge University Press, number 9780521388702, April.
    6. repec:fth:louvco:9853 is not listed on IDEAS
    7. P. Herings & Karl Schmedders, 2006. "Computing equilibria in finance economies with incomplete markets and transaction costs," Economic Theory, Springer, vol. 27(3), pages 493-512, 04.
    8. Pradeep Dubey & John Geanakoplos, 2003. "Real Determinacy with Nominal Assets," Cowles Foundation Discussion Papers 1427, Cowles Foundation for Research in Economics, Yale University.
    9. John Geanakoplos & Pradeep Dubey, 1989. "Liquidity and Bankruptcy with Incomplete Markets: Pure Exchange," Cowles Foundation Discussion Papers 900, Cowles Foundation for Research in Economics, Yale University.
    10. James Bullard & Bruce D. Smith, 2001. "The value of inside and outside money," Working Papers 2000-027, Federal Reserve Bank of St. Louis.
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