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Monetary Policy with Incomplete Markets

Author

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  • Gourdel

    (CERMSEM)

  • Triki

    (CERMSEM)

Abstract

We consider an extension of a general equilibrium model with incomplete markets that considers cash-in-advance constraints. The total amount of money is supplied by an authority, which produces at no cost and lends money to agents at short term nominal rates of interest, meeting the demand. Agents have initial nominal claims, which in the aggregate, are the counterpart of an initial public debt. The authority covers its expenditures, including initial debt, through public revenues which consists of taxes and seignorage, and distributes its eventual budget surpluses through transfers to individuals, while no further instruments are available to correct eventual budget deficits. We define a concept of equilibrium in this extended model, and prove that there exists a monetary equilibrium with no transfers. Moreover, we show that if the price level is high enough, a monetary equilibrium with positive transfers exists.

Suggested Citation

  • Gourdel & Triki, 2005. "Monetary Policy with Incomplete Markets," Finance 0503026, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0503026
    Note: Type of Document - pdf; pages: 23
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    References listed on IDEAS

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    More about this item

    Keywords

    Cash-in-advance constraints; incomplete markets; nominal assets; monetary equilibrium; money; nominal interest rate; transfers; price levels;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • 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
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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