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Monetary Equilibria in a Baumol-Tobin Economy

Author

Listed:
  • Ingolf Schwarz

    () (Max Planck Institute for Research on Collective Goods, Bonn)

Abstract

This paper provides a non-steady state general equilibrium foundation for the transactions demand for money going back to Baumol (1952) and Tobin (1956). In our economy, money competes against real capital as a store of value. We prove existence of a monetary general equilibrium in which both real capital and fiat money are voluntarily held over time. The demand for money is generated by fixed transactions costs. More precisely, we assume that house-holds have two physically separated accounts. On the first account they finance consumption and might want to hold money over time. On the second account households receive their wages, hold claims on capital and earn interest income from renting capital to firms. Every transfer of wealth between the two accounts requires fixed resources. In equilibrium, households space apart the transaction dates in time. Between these transaction dates, money is held as a store of value on the first account for transactions purposes. The number of periods over which money is held is endogenous and the nonconvexity of the problem is explicitly taken into account.

Suggested Citation

  • Ingolf Schwarz, 2006. "Monetary Equilibria in a Baumol-Tobin Economy," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2006_15, Max Planck Institute for Research on Collective Goods.
  • Handle: RePEc:mpg:wpaper:2006_15
    as

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    References listed on IDEAS

    as
    1. David Romer, 1986. "A Simple General Equilibrium Version of the Baumol-Tobin Model," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 663-685.
    2. DREZE, Jacques & POLEMARCHAKIS, Heracles, 1995. "Monetary equilibria," CORE Discussion Papers 1995078, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Zeira, Joseph, 2005. "Money and the Size of Transactions," CEPR Discussion Papers 5010, C.E.P.R. Discussion Papers.
    4. Chatterjee, Satyajit & Corbae, Dean, 1992. "Endogenous Market Participation and the General Equilibrium Value of Money," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 615-646, June.
    5. Jovanovic, Boyan, 1982. "Inflation and Welfare in the Steady State," Journal of Political Economy, University of Chicago Press, vol. 90(3), pages 561-577, June.
    6. Rotemberg, Julio J, 1984. "A Monetary Equilibrium Model with Transactions Costs," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 40-58, February.
    7. Grossman, Sanford & Weiss, Laurence, 1983. "A Transactions-Based Model of the Monetary Transmission Mechanism," American Economic Review, American Economic Association, vol. 73(5), pages 871-880, December.
    8. Hellwig, Martin F., 1993. "The challenge of monetary theory," European Economic Review, Elsevier, vol. 37(2-3), pages 215-242, April.
    9. Ghiglino, Christian, 2005. "Wealth inequality and dynamic stability," Journal of Economic Theory, Elsevier, vol. 124(1), pages 106-115, September.
    10. Fernando Alvarez & Andrew Atkeson & Chris Edmond, 2003. "On the Sluggish Response of Prices to Money in an Inventory-Theoretic Model of Money Demand," NBER Working Papers 10016, National Bureau of Economic Research, Inc.
    11. Douglas Gale & Martin Hellwig, 1984. "A General-Equilibrium Model of the Transactions Demand for Money," STICERD - Theoretical Economics Paper Series 100, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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    More about this item

    Keywords

    Baumol-Tobin; Monetary Theory; General Equilibrium Theory;

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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