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 that 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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Find related papers by JEL classification: C62 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Existence and Stability Conditions of Equilibrium 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 G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
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DREZE, Jacques & POLEMARCHAKIS, Heracles, 2000.
"Monetary equilibria,"
CORE Discussion Papers
2000044, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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