Liquidity and Bankruptcy with Incomplete Markets: Pure Exchange

John Geanakoplos () and Pradeep Dubey
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John Geanakoplos: Cowles Foundation, Yale University, https://economics.yale.edu/people/faculty/john-geanakoplos

No 900, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We enlarge the standard model of general equilibrium with incomplete market (GEI), to incorporate liquidity constraints as well as the possibility of bankruptcy and default. A new equilibrium results, which we abbreviate GELBI (general equilibrium with liquidity, bankruptcy and incomplete markets). When the supply of bank money and bankruptcy/default penalties are taken sufficiently high (the high regime), GEI occur as GELBI. But outside the high regime many new phenomena appear: money is (almost) never neutral, it has positive value and its optimum quantity is often finite; bankruptcy and default not only occur in equilibrium but can have welfare improving consequences for everyone; there is no real indeterminacy even with financial assets.

Keywords: Incomplete markets; general equilibrium; bankruptcy; liquidity constraints (search for similar items in EconPapers)
Pages: 60 pages
Date: 1989-02
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Citations: View citations in EconPapers (22)

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