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A strategic market game with active bankruptcy

Listed author(s):
  • Geanakoplos, J.
  • Karatzas, I.
  • Shubik, M.
  • Sudderth, W.

We construct stationary Markov equilibria for an economy with fiat money, one non-durable commodity, countably-many time periods, and a continuum of agents. The total production of commodity remains constant, but individual agents' endowments fluctuate in a random fashion, from period to period. In order to hedge against these random fluctuations, agents find it useful to hold fiat money which they can borrow or deposit at appropriate rates of interest; such activity may take place either at a central bank (which fixes interest rates judiciously) or through a money-market (in which interest rates are determined endogenously). We carry out an equilibrium analysis, based on a careful study of Dynamic Programming equations and on properties of the Invariant Measures for associated optimally-controlled Markov chains. This analysis yields the stationary distribution of wealth across agents, as well as the stationary price (for the commodity) and interest rates (for the borrowing and lending of fiat money). A distinctive feature of our analysis is the incorporation of bankruptcy, both as a real possibility in an individual agent's optimization problem, as well as a determinant of interest rates through appropriate balance equations. These allow a central bank (respectively, a money-market) to announce (respectively, to determine endogenously) interest rates in a way that conserves the total money-supply and controls inflation. General results are provided for the existence of such stationary equilibria, and several explicitly solvable examples are treated in detail.

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Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 34 (2000)
Issue (Month): 3 (November)
Pages: 359-396

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Handle: RePEc:eee:mateco:v:34:y:2000:i:3:p:359-396
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  1. Karatzas, Ioannis & Shubik, Martin & Sudderth, William D., 1997. "A strategic market game with secured lending," Journal of Mathematical Economics, Elsevier, vol. 28(2), pages 207-247, September.
  2. Hohn Miller & Martin Shubik, 1994. "Some dynamics of a strategic market game with a large number of agents," Journal of Economics, Springer, vol. 60(1), pages 1-28, February.
  3. Geanakoplos, J. & Karatzas, I. & Shubik, M. & Sudderth, W., 2000. "A strategic market game with active bankruptcy," Journal of Mathematical Economics, Elsevier, vol. 34(3), pages 359-396, November.
  4. Feldman, Mark & Gilles, Christian, 1985. "An expository note on individual risk without aggregate uncertainty," Journal of Economic Theory, Elsevier, vol. 35(1), pages 26-32, February.
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