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Abstract

The introduction of banks that issue money and supply balances and pay out their profits as dividends is the natural modification of the model of general competitive equilibrium that encompasses monetary economies. Competitive equilibria exist. Nevertheless, eventhough there is a well defined money market, competitive equilibrium allocations are indeterminate.On an event tree with N nodes, of which S terminal, there are N + S degrees of nominal and, possibly real, indeterminacy. Monetary policy removes some degrees of indeterminacy through a choice of instruments, set according to a state-contingent rule. Interest rates are suitable instruments for the control of expected inflation but not of the variability of inflation.Monetary policy is also effective due to redistributive effects and nominal rigidities.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 1998053.

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Date of creation: 01 Sep 1998
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Handle: RePEc:cor:louvco:1998053

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Related research

Keywords: Money policy; equilibrium;

Find related papers by JEL classification:

• D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
• E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
• E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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1. repec:nbr:nberre:0126 is not listed on IDEAS
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   • Detemple, J. & Gottardi, P. & Polemarchakis, H., 1990. "The relevance of financial policy," CORE Discussion Papers 1990011, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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   • John Geanakoplos & Andreu Mas-Colell, 1985. "Real Indeterminacy with Financial Assets," Cowles Foundation Discussion Papers 770R, Cowles Foundation for Research in Economics, Yale University, revised Oct 1985.
5. Ostroy, Joseph M & Starr, Ross M, 1974. "Money and the Decentralization of Exchange," Econometrica, Econometric Society, vol. 42(6), pages 1093-1113, November.
   
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7. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
   
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11. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper 98-05, Federal Reserve Bank of Richmond.
    
    • Marvin Goodfriend & Robert King, 1997. "The New Neoclassical Synthesis and the Role of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 231-296 National Bureau of Economic Research, Inc.
12. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
13. Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier.

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Cited by:

1. Gaël Giraud & Céline Rochon, 2010. "Transition to Equilibrium in International Trades," Post-Print halshs-00657038, HAL.

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