The introduction of banks that issue money and supply balances and pay out their profis as dividends is the natural modification of the model of general competitive equilibrium that encompasses monetary economies with an operative transactions technology. Monetary policy sets nominal rates of interest and accommodates the demand for balances; alternatively, it sets the supply of balances and rates of interest adjust for money markets to clear. Competitive equilibria exist. Under uncertainty, monetary policy fails to determine the distribution of the rate of inflation or the allocation of resources at equilibrium. If, in addition to rates of interest, monetary policy sets the prices of contingent loans subject to no-arbitrage constraints, or targets the distribution of the terminal level of prices, it lifts the multiplicity.
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- Ostroy, Joseph M & Starr, Ross M, 1974.
"Money and the Decentralization of Exchange,"
Econometric Society, vol. 42(6), pages 1093-1113, November.
- Joseph M. Ostroy & Ross M. Starr, 1973. "Money and the Decentralization of Exchange," UCLA Economics Working Papers 041, UCLA Department of Economics.
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- P. Dubey & J. Geanakoplos, 2001. "Inside and Outside Money, Gains to Trade, and IS-LM," Department of Economics Working Papers 01-08, Stony Brook University, Department of Economics.
- Pradeep Dubey & John Geanakoplos, 2000. "Inside and Outside Money, Gains to Trade, and IS-LM," Cowles Foundation Discussion Papers 1257R, Cowles Foundation for Research in Economics, Yale University, revised Jun 2001.
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- BLOISE, Gaetano & DREZE, Jacques H. & POLEMARCHAKIS, Herakles M., "undated". "Monetary equilibria over an infinite horizon," CORE Discussion Papers RP 1750, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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