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General Equilibrium with Monopolistic Firms and Occasionally Binding Cash-in-Advance Constraints

Huw Dixon () and Panayiotis Pourpourides ()

No E2010/6, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: We show a simple way to introduce monopolistic competition in a general equilibrium model where prices are fully flexible, the velocity of money is variable and cash-in-advance (CIA) constraints occasionally bind. We establish the conditions under which money has real effects and demonstrate that an equilibrium that occurs at a binding CIA constraint is welfare inferior to any equilibrium that occurs at a non-binding CIA constraint with the same level of technology. We argue that even though the probability of a binding CIA constraint can be increasing with money supply, under certain conditions, expansionary money supply is welfare improving.

Keywords: general equilibrium; monopolistic competition (search for similar items in EconPapers)
JEL-codes: D43 E31 E41 E51 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2010-07
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mon
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