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On the Micro-Dynamics of a Cash-in-Advance Economy

Sander van der Hoog ()

No 04-12, CeNDEF Working Papers from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance

Abstract: The purpose of this paper is to develop a general equilibrium model with money and trade taking place outside of equilibrium. There are multiple markets which are visited sequentially by the agents and transactions occur at disequilibrium prices along the adjustment path. This implies quantity rationing and we assume that there is a cash-in-advance constraint which limits the agents' ability to transact. The updating of the prices and cash balances makes it necessary for agents to re-optimize their trading plans subject to new information due to substitution and spill-over effects. The dynamics of this disequilibrium price and quantity process are shown to depend crucially on the exchange mechanisms that are imposed. One of the results is that the introduction of a cash-in-advance constraint, although it prevents debts from occurring outside of equilibrium, does not stabilize endogenous fluctuations.

Date: 2004
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