Welfare-improving debt constraints
We show that in economies without liquidity frictions, but with incomplete financial markets, when agents are infinitely lived and uniformly impatient, money can still be essential (that is, have a positive price in equilibrium) if and only if each agent has binding debt constraints at some node of her life span. That is, contrary to what might be expected, in the absence of a very productive financial market, frictions induced by debt constraints create some room for improving efficiency, by allowing money to have a role in transferring wealth across dates and states of nature.
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- Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
- Magill, M. & Quinzii, M., 1993.
"Icomplete Markets Over an Infinite Horizon: Long-Lived Securities and Speculative Bubbles,"
9321, Southern California - Department of Economics.
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- Hernandez D., Alejandro & Santos, Manuel S., 1996. "Competitive Equilibria for Infinite-Horizon Economies with Incomplete Markets," Journal of Economic Theory, Elsevier, vol. 71(1), pages 102-130, October.
- Manuel Santos, 2006. "The value of money in a dynamic equilibrium model," Economic Theory, Springer, vol. 27(1), pages 39-58, 01.
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