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Monetary Equilibria in a Cash-in-Advance Economy with Incomplete Financial Markets

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Author Info
Ingolf Schwarz () (Max-Planck-Institute for Research on Collective Goods)
Jinhui H. Bai () (Yale University, Department of Economics)

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Abstract

The general equilibrium model with incomplete financial markets (GEI) is extended by adding fiat money, fiscal and monetary policy and a cash-in-advance constraint. The central bank either pegs the interest rate or money supply while the fiscal authority sets a Ricardian or a non-Ricardian fiscal plan. We prove the existence of equilibria in all four scenarios. In Ricardian economies, the conditions required for existence are not more restrictive than in standard GEI. In non-Ricardian economies, the sufficient conditions for existence are more demanding. In the Ricardian economy, neither the price level nor the equivalent martingale measure are determinate.

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Publisher Info
Paper provided by Max Planck Institute for Research on Collective Goods in its series Working Paper Series of the Max Planck Institute for Research on Collective Goods with number 2005_18.

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Length: 43 pages
Date of creation: Sep 2005
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Handle: RePEc:mpg:wpaper:2005_18

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Related research
Keywords: Money; Incomplete Markets; Fiscal Policy; Indeterminacy;

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Find related papers by JEL classification:
D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
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

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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. Svensson, Lars E O, 1985. "Money and Asset Prices in a Cash-in-Advance Economy," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 919-44, October. [Downloadable!] (restricted)
  2. Woodford, Michael, 2001. "Fiscal Requirements for Price Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 669-728, August.
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  3. DREZE, Jacques & POLEMARCHAKIS, Heracles, 2000. "Monetary equilibria," CORE Discussion Papers 2000044, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
  4. Gaetano Bloise & Jacques Dréze & Herakles Polemarchakis, 2005. "Monetary equilibria over an infinite horizon," Economic Theory, Springer, vol. 25(1), pages 51-74, 01. [Downloadable!] (restricted)
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  5. Tomoyuki Nakajima & Herakles Polemarchakis, 2005. "Money and Prices Under Uncertainty," Review of Economic Studies, Blackwell Publishing, vol. 72(1), pages 223-246, 01. [Downloadable!] (restricted)
  6. 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)
  7. Pradeep Dubey & John Geanakoplos, 2003. "Monetary Equilibrium with Missing Markets," Cowles Foundation Discussion Papers 1389, Cowles Foundation, Yale University. [Downloadable!]
  8. Michael Woodford, 1995. "Price Level Determinacy Without Control of a Monetary Aggregate," NBER Working Papers 5204, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Duffie, Darrell & Shafer, Wayne, 1985. "Equilibrium in incomplete markets: I : A basic model of generic existence," Journal of Mathematical Economics, Elsevier, vol. 14(3), pages 285-300, June. [Downloadable!] (restricted)
  10. Gaetano Bloise & Herakles Polemarchakis, 2006. "Theory and practice of monetary policy," Economic Theory, Springer, vol. 27(1), pages 1-23, 01. [Downloadable!] (restricted)
  11. Pascal Gourdel & Leila Triki, 2005. "Incomplete markets and monetary policy," Cahiers de la Maison des Sciences Economiques b05024, Université Panthéon-Sorbonne (Paris 1). [Downloadable!]
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  12. Pradeep Dubey & John Geanakoplos, 2003. "Inside and outside fiat money, gains to trade, and IS-LM," Economic Theory, Springer, vol. 21(2), pages 347-397, 03. [Downloadable!] (restricted)
  13. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer, vol. 4(3), pages 345-80.
  14. Werner, Jan, 1985. "Equilibrium in economies with incomplete financial markets," Journal of Economic Theory, Elsevier, vol. 36(1), pages 110-119, June. [Downloadable!] (restricted)
  15. David Cass, 2006. "Competitive Equilibrium with Incomplete Financial Markets," PIER Working Paper Archive 06-010, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
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  16. Gaetano Bloise, 2006. "A note on the existence of a monetary equilibrium over an infinite horizon," Economic Theory, Springer, vol. 27(1), pages 59-77, 01. [Downloadable!] (restricted)
  17. Pradeep Dubey & John Geanakoplos, 2006. "Determinacy with nominal assets and outside money," Economic Theory, Springer, vol. 27(1), pages 79-106, 01. [Downloadable!] (restricted)
  18. Dubey, Pradeep & Geanakoplos, John, 2003. "Monetary equilibrium with missing markets," Journal of Mathematical Economics, Elsevier, vol. 39(5-6), pages 585-618, July. [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. Hendrik Hakenes & Isabel Schnabel, 2006. "The Threat of Capital Drain: A Rationale for Public Banks?," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2006_11, Max Planck Institute for Research on Collective Goods. [Downloadable!]
    Other versions:
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