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On the Micro-Dynamics of a Cash-in-Advance Economy

  • Hoog, S. van der


    (Universiteit van Amsterdam)

The purpose of this paper is to develop a general equilibrium model with money and trade taking place outside of equilibrium. There are multiple markets which are visited sequentially by the agents and transactions occur at disequilibrium prices along the adjustment path. This implies quantity rationing and we assume that there is a cash-in-advance constraint which limits the agents' ability to transact. The updating of the prices and cash balances makes it necessary for agents to re-optimize their trading plans subject to new information due to substitution and spill-over effects. The dynamics of this disequilibrium price and quantity process are shown to depend crucially on the exchange mechanisms that are imposed. One of the results is that the introduction of a cash-in-advance constraint, although it prevents debts from occurring outside of equilibrium, does not stabilize endogenous fluctuations.

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Paper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Working Papers with number 04-12.

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Date of creation: 2004
Date of revision:
Handle: RePEc:ams:ndfwpp:04-12
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  1. Jacques H.DREZE, 2001. "On the Macroeconomics of Uncertainty and Incomplete Markets," Discussion Papers (REL - Recherches Economiques de Louvain) 2001011, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
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  7. Svensson, Lars E O, 1981. " Effective Demand in a Sequence of Markets," Scandinavian Journal of Economics, Wiley Blackwell, vol. 83(1), pages 1-21.
  8. Dreze, Jacques H, 1975. "Existence of an Exchange Equilibrium under Price Rigidities," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 16(2), pages 301-20, June.
  9. Clower, Robert & Leijonhufvud, Axel, 1975. "The Coordination of Economic Activities: A Keynesian Perspective," American Economic Review, American Economic Association, vol. 65(2), pages 182-88, May.
  10. Gode, Dhananjay K & Sunder, Shyam, 1993. "Allocative Efficiency of Markets with Zero-Intelligence Traders: Market as a Partial Substitute for Individual Rationality," Journal of Political Economy, University of Chicago Press, vol. 101(1), pages 119-37, February.
  11. Y. Younes, 1975. "On the Role of Money in the Process of Exchange and the Existence of a Non-Walrasian Equilibrium," Review of Economic Studies, Oxford University Press, vol. 42(4), pages 489-501.
  12. Movshovich, Solomon M., 1994. "A price adjustment process in a rationed economy," Journal of Mathematical Economics, Elsevier, vol. 23(4), pages 305-321, July.
  13. Clower, Robert W, 1977. "The Anatomy of Monetary Theory," American Economic Review, American Economic Association, vol. 67(1), pages 206-12, February.
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