Inside and outside fiat money, gains to trade, and IS-LM

Pradeep Dubey and John Geanakoplos

Economic Theory, 2003, vol. 21, issue 2, 347-397

Abstract: We build a one-period general equilibrium model with money. Equilibrium exists, and fiat money has positive value, as long as the ratio of outside money to inside money is less than the gains to trade available at autarky. We show that the nominal effects of government fiscal and monetary policy can be completely described by a diagram identical in form to the IS-LM curves introduced by Hicks to describe Keynes' general theory. IS-LM analysis is thus not incompatible with full market clearing, multiple commodities, and heterogeneous households. We show that as the government deficit approaches a finite threshold, hyperinflation sets in (prices converge to infinity and real trade collapses). At the other extreme, if the government surplus is too large, the economy enters a liquidity trap in which nominal GNP sinks and monetary policy is ineffectual. Copyright Springer-Verlag Berlin Heidelberg 2003

Keywords: Keywords and Phrases: Central bank; Gains to trade; Inside money; IS-LM; Outside money.; JEL Classification Numbers: D50; E40; E50; E58. (search for similar items in EconPapers)
Date: 2003
References: Add references at CitEc
Citations: View citations in EconPapers (46)

Downloads: (external link)
http://hdl.handle.net/10.1007/s00199-002-0296-5 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:joecth:v:21:y:2003:i:2:p:347-397

Ordering information: This journal article can be ordered from
http://www.springer. ... eory/journal/199/PS2

DOI: 10.1007/s00199-002-0296-5

Access Statistics for this article

Economic Theory is currently edited by Nichoals Yanneils

More articles in Economic Theory from Springer, Society for the Advancement of Economic Theory (SAET) Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().