A Strategic Market Game with Active Bankruptcy
We construct stationary Markov equilibria for an economy with fiat money, one non-durable commodity, countably-many time periods, and a continuum of agents. The total production of commodity remains constant, but individual agents' endowments fluctuate in a random fashion, from period to period. In order to hedge against these random fluctuations, agents find it useful to hold fiat money which they can borrow or deposit at appropriate rates of interest; such activity may take place either at a central bank (which fixes interest rates judiciously) or through a money-market (in which interest rates are determined endogenously). We carry out an equilibrium analysis, based on a careful study of Dynamic Programming equations and on properties of the Invariant Measures for associated optimally-controlled Markov chains. This analysis yields the stationary distribution of wealth across agents, as well as the stationary price (for the commodity) and interest rates (for the borrowing and lending of fiat money). A distinctive feature of our analysis is the incorporation of bankruptcy, both as a real possibility in an individual agent's optimization problem, as well as a determinant of interest rates through appropriate balance equations. These allow a central bank (respectively, a money-market) to announce (respectively, to determine endogenously) interest rates in a way that conserves the total money-supply and controls inflation. General results are provided for the existence of such stationary equilibria, and several explicitly solvable examples are treated in detail.
|Date of creation:||Jun 1998|
|Publication status:||Published in Journal of Mathematical Economics (2000), 34(3): 359-396|
|Contact details of provider:|| Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA|
Phone: (203) 432-3702
Fax: (203) 432-6167
Web page: http://cowles.yale.edu/
More information through EDIRC
|Order Information:|| Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Karatzas, Ioannis & Shubik, Martin & Sudderth, William D., 1997.
"A strategic market game with secured lending,"
Journal of Mathematical Economics,
Elsevier, vol. 28(2), pages 207-247, September.
- Ioannis Karatzas & Martin Shubik & William D. Sudderth, 1995. "A Strategic Market Game With Secured Lending," Working Papers 95-03-037, Santa Fe Institute.
- Ioannis Karatzas & Martin Shubik & William D. Sudderth, 1995. "A Strategic Market Game with Secured Lending," Cowles Foundation Discussion Papers 1099, Cowles Foundation for Research in Economics, Yale University.
- Hohn Miller & Martin Shubik, 1994. "Some dynamics of a strategic market game with a large number of agents," Journal of Economics, Springer, vol. 60(1), pages 1-28, February.
- John H. Miller & Martin Shubik, 1992. "Some Dynamics of a Strategic Market Game with a Large Number of Agents," Cowles Foundation Discussion Papers 1037, Cowles Foundation for Research in Economics, Yale University.
- Geanakoplos, J. & Karatzas, I. & Shubik, M. & Sudderth, W., 2000. "A strategic market game with active bankruptcy," Journal of Mathematical Economics, Elsevier, vol. 34(3), pages 359-396, November.
- John Geanakoplos & Ioannis Karatzas & Martin Shubik & William D. Sudderth, 1998. "A Strategic Market Game with Active Bankruptcy," Cowles Foundation Discussion Papers 1183, Cowles Foundation for Research in Economics, Yale University.
- J. Geanakoplos & I. Karatzas & M. Shubik & W. Sudderth, 1999. "A Strategic Market Game with Active Bankruptcy," Working Papers 99-04-025, Santa Fe Institute.
- Feldman, Mark & Gilles, Christian, 1985. "An expository note on individual risk without aggregate uncertainty," Journal of Economic Theory, Elsevier, vol. 35(1), pages 26-32, February. Full references (including those not matched with items on IDEAS)