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Intertemporal general equilibrium and monetary theory

Author

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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," CORE Discussion Papers 1998053, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:1998053
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    File URL: https://uclouvain.be/en/research-institutes/immaq/core/dp-1998.html
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    References listed on IDEAS

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    3. Geanakoplos, John & Mas-Colell, Andreu, 1989. "Real indeterminacy with financial assets," Journal of Economic Theory, Elsevier, pages 22-38.
    4. Marvin Goodfriend & Robert King, 1997. "The New Neoclassical Synthesis and the Role of Monetary Policy," NBER Chapters,in: NBER Macroeconomics Annual 1997, Volume 12, pages 231-296 National Bureau of Economic Research, Inc.
    5. Ostroy, Joseph M & Starr, Ross M, 1974. "Money and the Decentralization of Exchange," Econometrica, Econometric Society, pages 1093-1113.
    6. Detemple, J. & Gottardi, P. & Polemarchakis, H. M., 1995. "The relevance of financial policy," European Economic Review, Elsevier, pages 1133-1154.
    7. Hellwig, Martin F., 1993. "The challenge of monetary theory," European Economic Review, Elsevier, vol. 37(2-3), pages 215-242, April.
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    Cited by:

    1. 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.

    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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