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

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Listed author(s):
  • Ingolf Schwarz

    ()

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

  • Jinhui H. Bai

    ()

    (Yale University, Department of Economics)

Abstract

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
Handle: RePEc:mpg:wpaper:2005_18
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Keywords: Money; Incomplete Markets; Fiscal Policy; Indeterminacy;

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Find related papers by JEL classification:
  • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
  • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
  • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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  1. DREZE, Jacques H. & POLEMARCHAKIS, Heracles, "undated". "Monetary equilibria," CORE Discussion Papers RP 1525, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Pascal Gourdel & Leila Triki, 2005. "Incomplete markets and monetary policy," Cahiers de la Maison des Sciences Economiques b05024, Université Panthéon-Sorbonne (Paris 1).
  3. Woodford, Michael, 1995. "Price-level determinacy without control of a monetary aggregate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 1-46, December.
  4. Woodford, Michael, 1994. "Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 345-380.
  5. Gaetano Bloise & Jacques Dréze & Herakles Polemarchakis, 2005. "Monetary equilibria over an infinite horizon," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 25(1), pages 51-74, 01.
  6. 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 135-162, January.
  7. Dubey, Pradeep & Geanakoplos, John, 2003. "Monetary equilibrium with missing markets," Journal of Mathematical Economics, Elsevier, vol. 39(5-6), pages 585-618, July.
  8. Pradeep Dubey & John Geanakoplos, 2003. "Inside and outside fiat money, gains to trade, and IS-LM," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 21(2), pages 347-397, 03.
  9. Gaetano Bloise, 2006. "A note on the existence of a monetary equilibrium over an infinite horizon," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 27(1), pages 59-77, 01.
  10. Gaetano Bloise & Herakles Polemarchakis, 2006. "Theory and practice of monetary policy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 27(1), pages 1-23, 01.
  11. Werner, Jan, 1985. "Equilibrium in economies with incomplete financial markets," Journal of Economic Theory, Elsevier, vol. 36(1), pages 110-119, June.
  12. Pradeep Dubey & John Geanakoplos, 2006. "Determinacy with nominal assets and outside money," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 27(1), pages 79-106, 01.
  13. Woodford, Michael, 2001. "Fiscal Requirements for Price Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 669-728, August.
  14. Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
  15. Cass, David, 2006. "Competitive equilibrium with incomplete financial markets," Journal of Mathematical Economics, Elsevier, vol. 42(4-5), pages 384-405, August.
  16. 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.
  17. 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 919-944, October.
  18. Tomoyuki Nakajima & Herakles Polemarchakis, 2005. "Money and Prices Under Uncertainty," Review of Economic Studies, Oxford University Press, vol. 72(1), pages 223-246.
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Cited by:

  1. McMahon, Michael & Peiris, Udara & Polemarchakis, Herakles, 2015. "Perils of quantitative easing," The Warwick Economics Research Paper Series (TWERPS) 1089, University of Warwick, Department of Economics.
  2. Hakenes, Hendrik & Schnabel, Isabel, 2006. "The Threat of Capital Drain: A Rationale for Public Banks?," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 107, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  3. Canzoneri, Matthew & Cumby, Robert & Diba, Behzad, 2010. "The Interaction Between Monetary and Fiscal Policy," Handbook of Monetary Economics,in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 17, pages 935-999 Elsevier.

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