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On the Micro-Dynamics of a Cash-in-Advance Economy (revised version of WP 04-12)

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Author Info
Hoog S. van der () (Universiteit van Amsterdam)

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Abstract

The purpose of this paper is to develop a general equilibrium model with money and trade taking place at disequilibrium prices. There are multiple markets being visited sequentially and transactions occur along the adjustment path. This implies quantity rationing to clear the market and we assume that there are cash-in-advance constraints on the transactions. The updating of the prices and cash balances along the way makes it necessary for agents to reconsider their trading plans subject to new information due to substitution and spill-over effects. The dynamics of this disequilibrium re-optimization process are shown to depend crucially on the exchange mechanisms that are imposed. One of the results is that the introduction of a cash-in-advance constraint does not help in stabilizing the fluctuations of cash balances, even though it does prevent debts from occurring outside of equilibrium.

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Paper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Working Papers with number 05-04.

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Date of creation: 2005
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Handle: RePEc:ams:ndfwpp:05-04

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Postal: Dept. of Economics and Econometrics, Universiteit van Amsterdam, Roetersstraat 11, NL - 1018 WB Amsterdam, The Netherlands
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  9. DREZE, Jacques, 1999. "On the macroeconomics of uncertainty and incomplete markets," CORE Discussion Papers 1999064, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
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