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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)

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

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  1. Magill, M. & Quinzii, M., 1993. "Icomplete Markets Over an Infinite Horizon: Long-Lived Securities and Speculative Bubbles," Papers 9321, Southern California - Department of Economics.
  2. 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.
  3. Manuel Santos, 2006. "The value of money in a dynamic equilibrium model," Economic Theory, Springer, vol. 27(1), pages 39-58, 01.
  4. 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.
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