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On Imperfect Competition with Occasionally Binding Cash-in-Advance Constraints

Author

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  • Huw Dixon

    (Cardiff Business School)

  • Panayiotis M. Pourpourides

    (Central Bank of Cyprus)

Abstract

We provide extensive theoretical analysis of the general equilibrium of an economy with imperfect competition in the final goods sector, endogenous production and fully flexible prices in the presence of occasionally binding cash-in-advance (CIA) constraints, under general assumptions about the velocity of money. Whether the CIA constraint binds or not and the induced variability of the velocity of money depend on expectations of risk-averse consumers about the future relative value of money as well as the degree of imperfect competition. We establish the uniqueness of the equilibrium, the conditions under which money has real effects, even in the absence of other real assets, and examine the role of imperfect competition and welfare implications. With perfect foresight, in a zero-inflation steady state the CIA constraint strictly binds and output is less than would occur when the CIA constraint is non-binding. There is also an optimal negative steady-state inflation rate. Finally, we consider how the introduction of capital and bonds would fit into the framework.

Suggested Citation

  • Huw Dixon & Panayiotis M. Pourpourides, 2011. "On Imperfect Competition with Occasionally Binding Cash-in-Advance Constraints," Working Papers 2011-3, Central Bank of Cyprus.
  • Handle: RePEc:cyb:wpaper:2011-3
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    Cited by:

    1. Tom D. Holden & Paul Levine & Jonathan M. Swarbrick, 2020. "Credit Crunches from Occasionally Binding Bank Borrowing Constraints," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(2-3), pages 549-582, March.
    2. Jonathan Swarbrick, 2021. "Occasionally Binding Constraints in Large Models: A Review of Solution Methods," Discussion Papers 2021-5, Bank of Canada.

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    More about this item

    Keywords

    Cash-in-advance; general equilibrium; monopolistic competition; imperfect competition; money velocity.;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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