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Nominal Uniqueness and Money Non-neutrality in the Limit-Price Exchange Process

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  • Gaël Giraud

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne, EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)

  • Dimitrios P. Tsomocos

    ()
    (Saïd Business School University - University of Oxford)

Abstract

We define continuous-time dynamics for exchange economies with fiat money. Traders have locally rational expectations, face a cash-in-advance constraint, and continuously adjust their short-run dominant strategy in a monetary strategic market game involving a double-auction with limit-price orders. Money has a positive value except on optimal rest-points where it becomes a "veil" and trade vanishes. Typically, there is a peicewise globally unique trade-ant-price curve both in real and in nominal variables. Money is not neutral, either in the short-run or long-run, and a localized version of the quantity theory of money holds in the short-run. An optimal money growth rate is derived, which enables monetary trade curves to converge towards Pareto optimal rest-points. Below this growth rate, the economy enters a (sub-optimal) liquidity trap where monetary policy is ineffective ; above this threshold inflation rises. Finally, market liquidity, measured through the speed of real trades, can be linked to gains-to-trade, households' expectations, and the quantity of circulating money.

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Bibliographic Info

Paper provided by HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00505141.

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Date of creation: Jun 2010
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Handle: RePEc:hal:cesptp:halshs-00505141

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Keywords: Bank ; money ; price-quantity dynamics ; inside money ; outside money ; rational expectations ; liquidity ; double auction ; limit-price orders ; inflation ; bounded rationality;

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  1. Pradeep Dubey & John Geanakoplos, 2006. "Determinacy with nominal assets and outside money," Economic Theory, Springer, Springer, vol. 27(1), pages 79-106, 01.
  2. Florig, Michael, 2001. "Hierarchic competitive equilibria," Journal of Mathematical Economics, Elsevier, vol. 35(4), pages 515-546, July.
  3. Gaël Giraud & Dimitrios Tsomocos, 2004. "Global uniqueness and money non-neutrality in a Walrasian dynamics without rational expectations," Cahiers de la Maison des Sciences Economiques, Université Panthéon-Sorbonne (Paris 1) b04121, Université Panthéon-Sorbonne (Paris 1).
  4. Dimitrios P Tsomocos & Charles A.E. Goodhart, 2003. "A Model to Analyse Financial Fragility," Economics Series Working Papers, University of Oxford, Department of Economics 2003-FE-13, University of Oxford, Department of Economics.
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  6. Tsomocos, Dimitrios P., 2008. "Generic determinacy and money non-neutrality of international monetary equilibria," Journal of Mathematical Economics, Elsevier, vol. 44(7-8), pages 866-887, July.
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  8. Gaël Giraud, 2004. "The limit-price exchange process," Cahiers de la Maison des Sciences Economiques, Université Panthéon-Sorbonne (Paris 1) b04118, Université Panthéon-Sorbonne (Paris 1).
  9. Grandmont, Jean-Michel & Younes, Yves, 1972. "On the Role of Money and the Existence of a Monetary Equilibrium," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 39(3), pages 355-72, July.
  10. Dimitrios P. Tsomocos, 2003. "Equilibrium Analysis, Banking and Financial Instability," OFRC Working Papers Series, Oxford Financial Research Centre 2003fe08, Oxford Financial Research Centre.
  11. Alan P. Kirman, 1992. "Whom or What Does the Representative Individual Represent?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 6(2), pages 117-136, Spring.
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  14. MERTENS , Jean-François, 1996. "The limit-price mechanism," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 1996050, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  15. Weyers, Sonia, 2003. "A strategic market game with limit prices," Journal of Mathematical Economics, Elsevier, vol. 39(5-6), pages 529-558, July.
  16. M. Shubik & D. Tsomocos, 1992. "A strategic market game with a mutual bank with fractional reserves and redemption in gold," Journal of Economics, Springer, Springer, vol. 55(2), pages 123-150, June.
  17. Giraud, Gael, 2003. "Strategic market games: an introduction," Journal of Mathematical Economics, Elsevier, vol. 39(5-6), pages 355-375, July.
  18. Dubey, Pradeep & Geanakoplos, John, 2003. "Monetary equilibrium with missing markets," Journal of Mathematical Economics, Elsevier, vol. 39(5-6), pages 585-618, July.
  19. Pradeep Dubey & John Geanakoplos, 2003. "Monetary Equilibrium with Missing Markets," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1389, Cowles Foundation for Research in Economics, Yale University.
  20. Raphaël Espinoza & Charles. Goodhart & Dimitrios Tsomocos, 2009. "State prices, liquidity, and default," Economic Theory, Springer, Springer, vol. 39(2), pages 177-194, May.
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Cited by:
  1. repec:hal:journl:halshs-00609824 is not listed on IDEAS
  2. Huw Dixon & Panayiotis M. Pourpourides, 2011. "On Imperfect Competition with Occasionally Binding Cash-in-Advance Constraints," Working Papers, Central Bank of Cyprus 2011-3, Central Bank of Cyprus.
  3. repec:hal:journl:halshs-00657038 is not listed on IDEAS
  4. repec:hal:journl:halshs-00657047 is not listed on IDEAS
  5. Gaël Giraud & Nguenamadji Orntangar, 2011. "Monetary policy under finite speed of trades and myopia," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers), HAL halshs-00609824, HAL.
  6. Dmitry Levando, 2012. "A Survey Of Strategic Market Games," Economic Annals, Faculty of Economics, University of Belgrade, vol. 57(194), pages 63-106, July - Se.

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