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The value of money in a dynamic equilibrium model

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  • Manuel Santos

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    Abstract

    This paper studies the pricing of money in an infinite-horizon economy with heterogeneous agents, incomplete financial markets and arbitrary borrowing restrictions. Purchases of the consumption good are subject to a cash-in-advance constraint. Under general conditions I show that the price of money is equal to its fundamental value, where this value is defined over all state-price processes that are compatible with the existence of no-arbitrage opportunities. This equality implies that the cash-in-advance constraint is binding infinitely often for all agents in the economy. The analysis highlights certain differences in the determination of the price of money with respect to models with money in the utility function that bear on the optimal implementation of economic policies. Copyright Springer-Verlag Berlin/Heidelberg 2006

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    File URL: http://hdl.handle.net/10.1007/s00199-004-0552-y
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    Bibliographic Info

    Article provided by Springer in its journal Economic Theory.

    Volume (Year): 27 (2006)
    Issue (Month): 1 (01)
    Pages: 39-58

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    Handle: RePEc:spr:joecth:v:27:y:2006:i:1:p:39-58

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    Web page: http://link.springer.de/link/service/journals/00199/index.htm

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    Related research

    Keywords: Cash-in-advance; Incomplete financial markets; Borrowing limits; Pricing by arbitrage; Fundamental value.;

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    Cited by:
    1. Aloisio Araujo & Mario Pascoa & Juan Pablo Torres-Martinez, 2005. "Bubbles, collateral and monetary equilibrium," Textos para discussão 513, Department of Economics PUC-Rio (Brazil).
    2. Wei-Bin Zhang, 2014. "National and International Inequalities in Income and Wealth in a Global Growth with Free Trade and National Inflation Policies," Global Economic Observer, "Nicolae Titulescu" University of Bucharest, Faculty of Economic Sciences & Institute for World Economy of the Romanian Academy, vol. 2(1), pages 22-40, May.
    3. Mario R. Páscoa & Myrian Petrassi & Juan Pablo Torres-Martinez, 2007. "Welfare-improving debt constraints," Textos para discussão 541, Department of Economics PUC-Rio (Brazil), revised Dec 2007.

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