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

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  • 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.

Suggested Citation

  • Ingolf Schwarz & Jinhui H. Bai, 2005. "Monetary Equilibria in a Cash-in-Advance Economy with Incomplete Financial Markets," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2005_18, Max Planck Institute for Research on Collective Goods.
    • Handle: RePEc:mpg:wpaper:2005_18
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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.

    More about this item

    Keywords

    Money; Incomplete Markets; Fiscal Policy; Indeterminacy;

    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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