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Intertemporal general equilibrium and monetary theory

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  • DREZE, Jacques H.

    (Center for Operations Research and Econometrics (CORE), Université catholique de Louvain (UCL), Louvain la Neuve, Belgium)

  • POLEMARCHAKIS, Heracles M.

    (Center for Operations Research and Econometrics (CORE), Université catholique de Louvain (UCL), Louvain la Neuve, Belgium)

Abstract

The introduction of banks that issue money and supply balances and pay out their profits as dividends is the natural modification of the model of general competitive equilibrium that encompasses monetary economies. Competitive equilibria exist. Nevertheless, eventhough there is a well defined money market, competitive equilibrium allocations are indeterminate.On an event tree with N nodes, of which S terminal, there are N + S degrees of nominal and, possibly real, indeterminacy. Monetary policy removes some degrees of indeterminacy through a choice of instruments, set according to a state-contingent rule. Interest rates are suitable instruments for the control of expected inflation but not of the variability of inflation.Monetary policy is also effective due to redistributive effects and nominal rigidities.

Suggested Citation

  • DREZE, Jacques H. & POLEMARCHAKIS, Heracles M., 1998. "Intertemporal general equilibrium and monetary theory," LIDAM Discussion Papers CORE 1998053, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:1998053
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    Cited by:

    1. Pascal Gourdel & Leila Triki, 2005. "Incomplete markets and monetary policy," Cahiers de la Maison des Sciences Economiques b05024, Université Panthéon-Sorbonne (Paris 1).
    2. Pascal Gourdel & Leila Triki, 2005. "Incomplete markets and monetary policy," Post-Print halshs-00193970, HAL.
    3. Gaël Giraud & Céline Rochon, 2010. "Transition to Equilibrium in International Trades," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00657038, HAL.
    4. Michael Magill & Martine Quinzii, 2014. "Term structure and forward guidance as instruments of monetary policy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 56(1), pages 1-32, May.
    5. Gourdel & Triki, 2005. "Monetary Policy with Incomplete Markets," Finance 0503026, University Library of Munich, Germany.
    6. Monique Florenzano & Stella Kanellopoulou & Yiannis Vailakis, 2006. "Equilibrium of incomplete markets with money and intermediate banking system," Post-Print halshs-00112209, HAL.
    7. Marko Backovic & Zoran Popovic, 2012. "The Analysis Of Model Of General Economic Equilibrium And Financial Instability Of Economic System," Montenegrin Journal of Economics, Economic Laboratory for Transition Research (ELIT), vol. 8(1), pages 63-85.
    8. Magill, Michael & Quinzii, Martine, 2014. "Anchoring expectations of inflation," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 86-105.

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    More about this item

    Keywords

    Money policy; equilibrium;

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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