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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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