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Money and Production, and Liquidity Trap

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    Abstract

    We prove the existence of monetary equilibrium in a finite horizon economy with production. We also show that if agents expect the monetary authority to significantly decrease the supply of bank money available for short term loans in the future, then the economy will fall into a liquidity trap today.

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    File URL: http://cowles.econ.yale.edu/P/cd/d15b/d1574.pdf
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    Bibliographic Info

    Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1574.

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    Length: 26 pages
    Date of creation: Jul 2006
    Date of revision:
    Publication status: Published in International Journal of Economic Theory (2006), 2(3/4): 295-317
    Handle: RePEc:cwl:cwldpp:1574

    Note: CFP 1200
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    Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA
    Phone: (203) 432-3702
    Fax: (203) 432-6167
    Web page: http://cowles.econ.yale.edu/
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    Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

    Related research

    Keywords: Central bank; Inside money; Outside money; Incomplete assets; Production; Monetary equilibrium; Liquidity; Liquidity trap;

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    1. GRANDMONT, Jean-Michel & LAROQUE, Guy, . "On money and banking," CORE Discussion Papers RP -215, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Grossman, Sanford J & Hart, Oliver D, 1979. "A Theory of Competitive Equilibrium in Stock Market Economies," Econometrica, Econometric Society, vol. 47(2), pages 293-329, March.
    3. Grandmont, Jean-Michel & Younes, Yves, 1972. "On the Role of Money and the Existence of a Monetary Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 39(3), pages 355-72, July.
    4. Robert E. Lucas Jr. & Nancy L. Stokey, 1984. "Money and Interest in Cash-In-Advance Economy," Discussion Papers 628, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    5. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
    6. Hool, Bryce, 1976. "Money, Expectations and the Existence of a Temporary Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 43(3), pages 439-45, October.
    7. Paul R. Krugman, 1998. "It's Baaack: Japan's Slump and the Return of the Liquidity Trap," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 137-206.
    8. Dubey, Pradeep & Geanakoplos, John, 2003. "Monetary equilibrium with missing markets," Journal of Mathematical Economics, Elsevier, vol. 39(5-6), pages 585-618, July.
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    Cited by:
    1. Guido Lorenzoni & Veronica Guerrieri, 2010. "Credit Crises and Liquidity Traps," 2010 Meeting Papers 1182, Society for Economic Dynamics.

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