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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 1 - 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. 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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  18. Pradeep Dubey & John Geanakoplos, 2003. "Monetary Equilibrium with Missing Markets," Cowles Foundation Discussion Papers 1389, Cowles Foundation for Research in Economics, Yale University.
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Citations

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Cited by:
  1. Gaël Giraud & Nguenamadji Orntangar, 2011. "Monetary policy under finite speed of trades and myopia," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00609824, HAL.
  2. Gaël Giraud, 2010. "Financial crashes versus liquidity trap : the dilemma of monetary policy," Post-Print halshs-00657047, HAL.
  3. Huw Dixon & Panayiotis M. Pourpourides, 2011. "On Imperfect Competition with Occasionally Binding Cash-in-Advance Constraints," Working Papers 2011-3, Central Bank of Cyprus.
  4. Gaël Giraud & Céline Rochon, 2010. "Transition to Equilibrium in International Trades," Post-Print halshs-00657038, HAL.
  5. 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.
  6. Gaël Giraud & Nguenamadji Orntangar, 2011. "Monetary policy under finite speed of trades and myopia," Post-Print halshs-00609824, HAL.

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