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Inside and outside fiat money, gains to trade, and IS-LM

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  • Pradeep Dubey
  • John Geanakoplos
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    Abstract

    We build a one-period general equilibrium model with money. Equilibrium exists, and fiat money has positive value, as long as the ratio of outside money to inside money is less than the gains to trade available at autarky. We show that the nominal effects of government fiscal and monetary policy can be completely described by a diagram identical in form to the IS-LM curves introduced by Hicks to describe Keynes' general theory. IS-LM analysis is thus not incompatible with full market clearing, multiple commodities, and heterogeneous households. We show that as the government deficit approaches a finite threshold, hyperinflation sets in (prices converge to infinity and real trade collapses). At the other extreme, if the government surplus is too large, the economy enters a liquidity trap in which nominal GNP sinks and monetary policy is ineffectual. Copyright Springer-Verlag Berlin Heidelberg 2003

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    Bibliographic Info

    Article provided by Springer in its journal Economic Theory.

    Volume (Year): 21 (2003)
    Issue (Month): 2 (03)
    Pages: 347-397

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    Handle: RePEc:spr:joecth:v:21:y:2003:i:2:p:347-397

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    Related research

    Keywords: Keywords and Phrases: Central bank; Gains to trade; Inside money; IS-LM; Outside money.; JEL Classification Numbers: D50; E40; E50; E58.;

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    Cited by:
    1. Jinhui H. Bai & Ingolf Schwarz, 2006. "Monetary Equilibria in a Cash-in-Advance Economy with Incomplete Financial Markets," Working Papers gueconwpa~06-06-05, Georgetown University, Department of Economics.
    2. Tsvetomira Tsenova, 2014. "International monetary transmission with bank heterogeneity and default risk," Annals of Finance, Springer, vol. 10(2), pages 217-241, May.
    3. Dror Goldberg, 2012. "The tax-foundation theory of fiat money," Economic Theory, Springer, vol. 50(2), pages 489-497, June.
    4. Gaël Giraud & Dimitrios Tsomocos, 2004. "Global uniqueness and money non-neutrality in a Walrasian dynamics without rational expectations," Cahiers de la Maison des Sciences Economiques b04121, Université Panthéon-Sorbonne (Paris 1).
    5. Dubey, Pradeep & Geanakoplos, John, 2003. "Monetary equilibrium with missing markets," Journal of Mathematical Economics, Elsevier, vol. 39(5-6), pages 585-618, July.
    6. Geanakoplos, John & Dubey, Pradeep, 2010. "Credit cards and inflation," Games and Economic Behavior, Elsevier, vol. 70(2), pages 325-353, November.
    7. Ngoc-Sang Pham, 2013. "Collateral monetary equilibrium with liquidity constraints in an infinite horizon economy," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00848057, HAL.
    8. Gaël Giraud & Myrna Wooders, 2012. "On the Simultaneous Emergence of Money and the State," Documents de travail du Centre d'Economie de la Sorbonne 12094, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    9. Bloise, Gaetano, 2006. "Money, gains to trade and impatience," Research in Economics, Elsevier, vol. 60(1), pages 22-34, March.
    10. repec:hal:journl:halshs-00786075 is not listed on IDEAS
    11. Magill, Michael & Quinzii, Martine, 2014. "Anchoring expectations of inflation," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 86-105.

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