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Welfare-improving debt constraints

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Author Info
Mario R. Páscoa
Myrian Petrassi () (Department of Economics, PUC-Rio)
Juan Pablo Torres-Martinez () (Department of Economics, PUC-Rio)

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Abstract

We show that in economies without liquidity frictions, but with incomplete financial markets, when agents are infinitely lived and uniformly impatient, money can still be essential (that is, have a positive price in equilibrium) if and only if each agent has binding debt constraints at some node of her life span. That is, contrary to what might be expected, in the absence of a very productive financial market, frictions induced by debt constraints create some room for improving efficiency, by allowing money to have a role in transferring wealth across dates and states of nature.

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Publisher Info
Paper provided by Department of Economics PUC-Rio (Brazil) in its series Textos para discussão with number 541.

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Length: 15p
Date of creation: Mar 2007
Date of revision: Dec 2007
Handle: RePEc:rio:texdis:541

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Related research
Keywords: Cashless economies; Binding debt constraints; Fundamental value of money.;

Find related papers by JEL classification:
D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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References listed on IDEAS
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  1. Manuel S. Santos & Michael Woodford, 1997. "Rational Asset Pricing Bubbles," Econometrica, Econometric Society, vol. 65(1), pages 19-58, January.
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  2. Magill, Michael & Quinzii, Martine, 1996. "Incomplete markets over an infinite horizon: Long-lived securities and speculative bubbles," Journal of Mathematical Economics, Elsevier, vol. 26(1), pages 133-170. [Downloadable!] (restricted)
    Other versions:
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This page was last updated on 2009-11-17.

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