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Fiat money and the value of binding portfolio constraints

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  • Páscoa, Mário R.
  • Petrassi, Myrian
  • Torres-Martínez, Juan Pablo

Abstract

We establish necessary and sufficient conditions for the individual optimality of a consumption-portfolio plan in an infinite horizon economy where agents are uniformly impatient and fiat money is the only asset available for inter-temporal transfers of wealth. Next, we show that fiat money has a positive equilibrium price if and only if for some agent the zero short sale constraint is binding and has a positive shadow price (now or in the future). As there is always an agent that is long, it follows that marginal rates of inter-temporal substitution never coincide across agents. That is, monetary equilibria are never full Pareto efficient. We also give a counter-example illustrating the occurrence of monetary bubbles under incomplete markets in the absence of uniform impatience.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13782.

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Date of creation: Mar 2009
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Handle: RePEc:pra:mprapa:13782

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Keywords: Binding credit constraints; Fundamental value of money; Asset pricing bubbles;

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  1. Mário Páscoa & Myrian Petrassi & Juan Pablo Torres-Martínez, 2008. "Fiat money and the value of binding portfolio constraints," Working Papers wp283, University of Chile, Department of Economics.
  2. Magill, M. & Quinzii, M., 1993. "Icomplete Markets Over an Infinite Horizon: Long-Lived Securities and Speculative Bubbles," Papers 9321, Southern California - Department of Economics.
  3. Grandmont, Jean-Michel & Younes, Yves, 1972. "On the Role of Money and the Existence of a Monetary Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 39(3), pages 355-72, July.
  4. Araujo, Aloisio. & Fajardo, J. & Páscoa. M. R., 2004. "Endogenous Collateral," Finance Lab Working Papers flwp_68, Finance Lab, Insper Instituto de Ensino e Pesquisa.
  5. 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, vol. 66, pages 467.
  6. Elyégs Jouini & Hédi Kallal, 1995. "Arbitrage In Securities Markets With Short-Sales Constraints," Mathematical Finance, Wiley Blackwell, vol. 5(3), pages 197-232.
  7. Grandmont, Jean-Michel & Younes, Yves, 1973. "On the Efficiency of a Monetary Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 40(2), pages 149-65, April.
  8. Manuel S. Santos & Michael Woodford, 1993. "Rational Asset Pricing Bubbles," Working Papers 9304, Centro de Investigacion Economica, ITAM.
  9. Laibson, David, 1998. "Life-cycle consumption and hyperbolic discount functions," European Economic Review, Elsevier, vol. 42(3-5), pages 861-871, May.
  10. Hahn, Frank H, 1973. "On Transaction Costs, Inessential Sequence Economies and Money," Review of Economic Studies, Wiley Blackwell, vol. 40(4), pages 449-61, October.
  11. Hernandez D., Alejandro & Santos, Manuel S., 1996. "Competitive Equilibria for Infinite-Horizon Economies with Incomplete Markets," Journal of Economic Theory, Elsevier, vol. 71(1), pages 102-130, October.
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Cited by:
  1. Aloisio Araujo & Mário Páscoa & Juan Pablo Torres-Martínez, 2008. "Long-lived Collateralized Assets and Bubbles," Working Papers wp284, University of Chile, Department of Economics.
  2. repec:hal:cesptp:halshs-00673995 is not listed on IDEAS
  3. Páscoa, Mário R. & Petrassi, Myrian & Torres-Martínez, Juan Pablo, 2009. "Fiat money and the value of binding portfolio constraints," MPRA Paper 13782, University Library of Munich, Germany.
  4. Emma Moreno-García & Juan Torres-Martínez, 2012. "Equilibrium existence in infinite horizon economies," Portuguese Economic Journal, Springer, vol. 11(2), pages 127-145, August.
  5. Jean-Marc Bottazzi & Jaime Luque & Mario R. Pascoa, 2011. "Trading and rational security pricing bubbles," Economics Working Papers we1119, Universidad Carlos III, Departamento de Economía.

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