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Inside and Outside Money, Gains to Trade, and IS-LM

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Author Info
Pradeep Dubey (SUNY at Stony Brook)
John Geanakoplos () (Cowles Foundation, Yale University)
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). If the government surplus is too large, the economy enters a liquidity trap in which nominal GNP sinks and monetary policy is ineffectual.

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Publisher Info
Paper provided by Cowles Foundation, Yale University in its series Cowles Foundation Discussion Papers with number 1257.

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Length: 52 pages
Date of creation: May 2000
Date of revision:
Publication status: Published in Economic Theory, 21, 2003
Handle: RePEc:cwl:cwldpp:1257

Note: CFP 1052
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Related research
Keywords: Bank; gains to trade; inside money; IS-LM; outside money;

Other versions of this item:

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
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Levine, David K, 1989. "Efficiency and the Value of Money," Review of Economic Studies, Blackwell Publishing, vol. 56(1), pages 77-88, January. [Downloadable!] (restricted)
  2. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467. [Downloadable!] (restricted)
  3. Magill, M. & Quinzii, M., 1992. "Real effects of money in general equilibrium," Journal of Mathematical Economics, Elsevier, vol. 21(4), pages 301-342. [Downloadable!] (restricted)
    Other versions:
  4. John Geanakoplos & Andreu Mas-Colell, 1985. "Real Indeterminacy with Financial Assets," Cowles Foundation Discussion Papers 770R, Cowles Foundation, Yale University, revised Oct 1985. [Downloadable!]
  5. Heller, Walter Perrin, 1974. "The holding of money balances in general equilibrium," Journal of Economic Theory, Elsevier, vol. 7(1), pages 93-108, January. [Downloadable!] (restricted)
  6. David K. Levine, 1989. "Efficiency and the Value of Money," Levine's Working Paper Archive 2161, David K. Levine. [Downloadable!]
  7. Bewley, Truman, 1983. "A Difficulty with the Optimum Quantity of Money," Econometrica, Econometric Society, vol. 51(5), pages 1485-504, September. [Downloadable!] (restricted)
    Other versions:
  8. Balasko, Yves & Cass, David, 1989. "The Structure of Financial Equilibrium with Exogenous Yields: The Case of Incomplete Markets," Econometrica, Econometric Society, vol. 57(1), pages 135-62, January. [Downloadable!] (restricted)
  9. Hool, Bryce, 1976. "Money, Expectations and the Existence of a Temporary Equilibrium," Review of Economic Studies, Blackwell Publishing, vol. 43(3), pages 439-45, October. [Downloadable!] (restricted)
  10. Grandmont, Jean-Michel & Younes, Yves, 1972. "On the Role of Money and the Existence of a Monetary Equilibrium," Review of Economic Studies, Blackwell Publishing, vol. 39(3), pages 355-72, July. [Downloadable!] (restricted)
  11. Ioannis Karatzas & Martin Shubik & William D. Sudderth, 1992. "Construction of Stationary Markov Equilibria in a Strategic Market Game," Cowles Foundation Discussion Papers 1033, Cowles Foundation, Yale University. [Downloadable!]
  12. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April. [Downloadable!] (restricted)
  13. Grandmont, Jean-Michel & Younes, Yves, 1973. "On the Efficiency of a Monetary Equilibrium," Review of Economic Studies, Blackwell Publishing, vol. 40(2), pages 149-65, April. [Downloadable!] (restricted)
  14. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Oxford University Press, vol. 18(2), pages 203-20, April.
  15. Dubey, Pradeep & Shapley, Lloyd S., 1994. "Noncooperative general exchange with a continuum of traders: Two models," Journal of Mathematical Economics, Elsevier, vol. 23(3), pages 253-293, May. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Yu Hsing, 2005. "Application of the IS-MP-IA model to the German economy and policy implications," Economics Bulletin, Economics Bulletin, vol. 15(5), pages 1-10. [Downloadable!]
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