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Fiat Money and the Value of Binding Portfolio Constraints

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

It is well known that, under uniform impatience, positive net supply assets are free of bubbles for non-arbitrage kernel deflators that yield finite present values of wealth. However, this does not mean that prices cannot be above the series of deflated dividends for the deflators given by the agents' marginal rates of substitution, which also yield finite present values of wealth. In particular, binding no-short-sales constraints lead to positive prices of fiat money. These monetary equilibria are Pareto improvements but they are still inefficient.

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Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 176.

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Date of creation: Jan 2009
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Handle: RePEc:bcb:wpaper:176
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  1. Mário Páscoa & Myrian Petrassi & Juan Torres-Martínez, 2011. "Fiat money and the value of binding portfolio constraints," Economic Theory, Springer, vol. 46(2), pages 189-209, February.
  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. Araujo, Aloisio. & Fajardo, J. & Páscoa. M. R., 2004. "Endogenous Collateral," Finance Lab Working Papers flwp_68, Finance Lab, Insper Instituto de Ensino e Pesquisa.
  4. Elyégs Jouini & Hédi Kallal, 1995. "Arbitrage In Securities Markets With Short-Sales Constraints," Mathematical Finance, Wiley Blackwell, vol. 5(3), pages 197-232.
  5. Jean-Michel Grandmont & Yves Younes, 1972. "On the Role of Money and the Existence of a Monetary Equilibrium," Review of Economic Studies, Oxford University Press, vol. 39(3), pages 355-372.
  6. Laibson, David, 1998. "Life-cycle consumption and hyperbolic discount functions," European Economic Review, Elsevier, vol. 42(3-5), pages 861-871, May.
  7. Frank Hahn, 1973. "On Transaction Costs, Inessential Sequence Economies and Money," Review of Economic Studies, Oxford University Press, vol. 40(4), pages 449-461.
  8. 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.
  9. Manuel S. Santos & Michael Woodford, 1993. "Rational Asset Pricing Bubbles," Working Papers 9304, Centro de Investigacion Economica, ITAM.
  10. 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.
  11. Jean-Michel Grandmont & Yves Younes, 1973. "On the Efficiency of a Monetary Equilibrium," Review of Economic Studies, Oxford University Press, vol. 40(2), pages 149-165.
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