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Incomplete markets and monetary policy

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  • Pascal Gourdel

    ()
    (CERMSEM - CEntre de Recherche en Mathématiques, Statistique et Économie Mathématique - CNRS : UMR8095 - Université Paris I - Panthéon-Sorbonne)

  • Leila Triki

    ()
    (CERMSEM - CEntre de Recherche en Mathématiques, Statistique et Économie Mathématique - CNRS : UMR8095 - Université Paris I - Panthéon-Sorbonne)

Abstract

We consider an extension of a general equilibrium model with incomplete markets that considers cash-in-advance constraints. The total amount of money is supplied by an authority, which produces at no cost and lends money to agents at short term nominal rates of interest, meeting the demand. Agents have initial nominal claims, which in the aggregate, are the counterpart of an initial public debt. The authority covers its expenditures, including initial debt, through public revenues which consists of taxes and seignorage, and distributes its eventual budget surpluses through transfers to individuals, while no further instruments are available to correct eventual budget deficits. We define a concept of equilibrium in this extended model, and prove that there exists a monetary equilibrium with no transfers. Moreover, we show that if the price level is high enough, a monetary equilibrium with transfers exists.

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Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00193970.

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Date of creation: Jan 2005
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Handle: RePEc:hal:cesptp:halshs-00193970

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Keywords: Cash-in-advance constraints; incomplete markets; nominal assets; monetary equilibrium; money; nominal interest rate.;

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  1. 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, University of Chicago Press, vol. 66, pages 467.
  2. DREZE, Jacques H. & POLEMARCHAKIS, Heracles, . "Monetary equilibria," CORE Discussion Papers RP -1525, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Monique Florenzano, 2008. "General equilibrium," Documents de travail du Centre d'Economie de la Sorbonne, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne b08005, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  4. Robert E. Lucas, Jr. & Nancy L. Stokey, 1985. "Money and Interest in a Cash-in-Advance Economy," NBER Working Papers 1618, National Bureau of Economic Research, Inc.
  5. Magill, M. & Quinzii, M., 1988. "Real Effects Of Money In General Equilibrium," Papers, Southern California - Department of Economics 8826, Southern California - Department of Economics.
  6. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
  7. GRANDMONT, Jean-Michel & YOUNES, Yves, . "On the efficiency of a monetary equilibrium," CORE Discussion Papers RP -135, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, Springer, vol. 4(3), pages 345-80.
  9. Werner, Jan, 1985. "Equilibrium in economies with incomplete financial markets," Journal of Economic Theory, Elsevier, vol. 36(1), pages 110-119, June.
  10. Duffie, Darrell, 1987. "Stochastic equilibria with incomplete financial markets," Journal of Economic Theory, Elsevier, vol. 41(2), pages 405-416, April.
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Cited by:
  1. Monique Florenzano & Stella Kanellopoulou & Yannis Vailakis, 2006. "Equilibrium of incomplete markets with money and intermediate banking system," Cahiers de la Maison des Sciences Economiques, Université Panthéon-Sorbonne (Paris 1) b06068, Université Panthéon-Sorbonne (Paris 1).
  2. repec:hal:journl:halshs-00112209 is not listed on IDEAS
  3. Jinhui H. Bai & Ingolf Schwarz, 2005. "Monetary Equilibria in a Cash-in-Advance Economy with Incomplete Financial Markets," JEPS Working Papers, JEPS 05-005, JEPS.

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