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Monetary Equilibria in a Cash-in-Advance Economy with Incomplete Financial Markets

  • Ingolf Schwarz

    ()

    (Max-Planck-Institute for Research on Collective Goods)

  • Jinhui H. Bai

    ()

    (Yale University, Department of Economics)

The general equilibrium model with incomplete financial markets (GEI) is extended by adding fiat money, fiscal and monetary policy and a cash-in-advance constraint. The central bank either pegs the interest rate or money supply while the fiscal authority sets a Ricardian or a non-Ricardian fiscal plan. We prove the existence of equilibria in all four scenarios. In Ricardian economies, the conditions required for existence are not more restrictive than in standard GEI. In non-Ricardian economies, the sufficient conditions for existence are more demanding. In the Ricardian economy, neither the price level nor the equivalent martingale measure are determinate.

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Paper provided by Max Planck Institute for Research on Collective Goods in its series Working Paper Series of the Max Planck Institute for Research on Collective Goods with number 2005_18.

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Length: 43 pages
Date of creation: Sep 2005
Date of revision:
Handle: RePEc:mpg:wpaper:2005_18
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  1. Duffie, Darrell & Shafer, Wayne, 1985. "Equilibrium in incomplete markets: I : A basic model of generic existence," Journal of Mathematical Economics, Elsevier, vol. 14(3), pages 285-300, June.
  2. Pradeep Dubey & John Geanakoplos, 2003. "Monetary Equilibrium with Missing Markets," Cowles Foundation Discussion Papers 1389, Cowles Foundation for Research in Economics, Yale University.
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  12. DREZE, Jacques H. & POLEMARCHAKIS, Heracles, . "Monetary equilibria," CORE Discussion Papers RP -1525, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  13. Pascal Gourdel & Leila Triki, 2005. "Incomplete markets and monetary policy," Cahiers de la Maison des Sciences Economiques b05024, Université Panthéon-Sorbonne (Paris 1).
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  16. Svensson, Lars E O, 1985. "Money and Asset Prices in a Cash-in-Advance Economy," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 919-44, October.
  17. Tomoyuki Nakajima & Herakles Polemarchakis, 2005. "Money and Prices Under Uncertainty," Review of Economic Studies, Oxford University Press, vol. 72(1), pages 223-246.
  18. Balasko, Yves & Cass, David, 1989. "The Structure of Financial Equilibrium with Exogenous Yields: The Case of Incomplete Markets," Econometrica, Econometric Society, vol. 57(1), pages 135-62, January.
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