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Nominal uniqueness and money non-neutrality in the limit-price exchange process

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  • Gaël Giraud

    ()

  • Dimitrios Tsomocos

    ()

Abstract

We define continuous-time dynamics for exchange economies with fiat money. Traders have locally rational expectations, face a cash-in-advance constraint, and continuously adjust their short-run dominant strategy in a monetary strategic market game involving a double-auction with limit-price orders. Money has a positive value except on optimal rest-points where it becomes a "veil" and trade vanishes. Typically, there is a peicewise globally unique trade-ant-price curve both in real and in nominal variables. Money is not neutral, either in the short-run or long-run, and a localized version of the quantity theory of money holds in the short-run. An optimal money growth rate is derived, which enables monetary trade curves to converge towards Pareto optimal rest-points. Below this growth rate, the economy enters a (sub-optimal) liquidity trap where monetary policy is ineffective ; above this threshold inflation rises. Finally, market liquidity, measured through the speed of real trades, can be linked to gains-to-trade, households' expectations, and the quantity of circulating money.

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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 45 (2010)
Issue (Month): 1 (October)
Pages: 303-348

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Handle: RePEc:spr:joecth:v:45:y:2010:i:1:p:303-348

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

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Related research

Keywords: Bank; Money; Price-quantity dynamics; Inside money; Outside money; Rational expectations; Liquidity; Double auction; Limit-price orders; Inflation; Bounded rationality; D50; D83; E12; E24; E30; E40; E41; E50; E58;

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References

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Citations

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Cited by:
  1. Huw Dixon & Panayiotis M. Pourpourides, 2011. "On Imperfect Competition with Occasionally Binding Cash-in-Advance Constraints," Working Papers 2011-3, Central Bank of Cyprus.
  2. Gaël Giraud, 2010. "Financial crashes versus liquidity trap : the dilemma of monetary policy," Post-Print halshs-00657047, HAL.
  3. Gaël Giraud & Nguenamadji Orntangar, 2011. "Monetary policy under finite speed of trades and myopia," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00609824, HAL.
  4. Gaël Giraud & Nguenamadji Orntangar, 2011. "Monetary policy under finite speed of trades and myopia," Post-Print halshs-00609824, HAL.
  5. Gaël Giraud & Céline Rochon, 2010. "Transition to Equilibrium in International Trades," Post-Print halshs-00657038, HAL.

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