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Nominal Uniqueness and Money Non-neutrality in the Limit-Price Exchange Process

Author

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  • Gaël Giraud

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Dimitrios P. Tsomocos

    (Saïd Business School University - University of Oxford)

Abstract

We define continuous-time dynamics for exchange economies with fiat money. Traders have locally rational expectations, face a cash-in-advance constraint, and continuously adjust their short-run dominant strategy in a monetary strategic market game involving a double-auction with limit-price orders. Money has a positive value except on optimal rest-points where it becomes a "veil" and trade vanishes. Typically, there is a peicewise globally unique trade-ant-price curve both in real and in nominal variables. Money is not neutral, either in the short-run or long-run, and a localized version of the quantity theory of money holds in the short-run. An optimal money growth rate is derived, which enables monetary trade curves to converge towards Pareto optimal rest-points. Below this growth rate, the economy enters a (sub-optimal) liquidity trap where monetary policy is ineffective; above this threshold inflation rises. Finally, market liquidity, measured through the speed of real trades, can be linked to gains-to-trade, households' expectations, and the quantity of circulating money.

Suggested Citation

  • Gaël Giraud & Dimitrios P. Tsomocos, 2010. "Nominal Uniqueness and Money Non-neutrality in the Limit-Price Exchange Process," Post-Print halshs-00505141, HAL.
    • Handle: RePEc:hal:journl:halshs-00505141
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00505141
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    References listed on IDEAS

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    Cited by:

    1. Gaël Giraud, 2010. "Financial crashes versus liquidity trap : the dilemma of monetary policy," Post-Print halshs-00657047, HAL.
    2. Gaël Giraud & Nguenamadji Orntangar, 2011. "Monetary Policy under Finite Speed of Trades and Myopia," Documents de travail du Centre d'Economie de la Sorbonne 11011, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    3. Gaël Giraud & Céline Rochon, 2010. "Transition to Equilibrium in International Trades," Documents de travail du Centre d'Economie de la Sorbonne 10012, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    4. Dixon, Huw & Pourpourides, Panayiotis M., 2016. "On imperfect competition with occasionally binding cash-in-advance constraints," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 72-85.
    5. Giraud, Gaël & Grasselli, Matheus, 2021. "Household debt: The missing link between inequality and secular stagnation," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 901-927.
    6. Dmitry Levando, 2012. "A Survey Of Strategic Market Games," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 57(194), pages 63-106, July - Se.
    7. Liao, Mouhua, 2016. "A market game with symmetric limit orders," Journal of Mathematical Economics, Elsevier, vol. 64(C), pages 66-76.

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    More about this item

    Keywords

    double auction; limit-price orders; inflation; bounded rationality; Bank; money; price-quantity dynamics; inside money; outside money; rational expectations; liquidity;
    All these keywords.

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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