Monetary Policy with Incomplete Markets

Pascal Gourdel and Triki
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Triki: CERMSEM

Finance from University Library of Munich, Germany

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.

Keywords: Cash-in-advance constraints; incomplete markets; nominal assets; monetary equilibrium; money; nominal interest rate; transfers; price levels (search for similar items in EconPapers)
JEL-codes: C62 D52 E40 E50 G10 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2005-03-29
New Economics Papers: this item is included in nep-cba, nep-fin and nep-mac
Note: Type of Document - pdf; pages: 23
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0503026

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