Inside and Outside Money, Gains to Trade, and IS-LM

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

No 1257, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

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). If the government surplus is too large, the economy enters a liquidity trap in which nominal GNP sinks and monetary policy is ineffectual.

Keywords: Bank; gains to trade; inside money; IS-LM; outside money (search for similar items in EconPapers)
JEL-codes: D50 E40 E50 E58 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2000-05
New Economics Papers: this item is included in nep-mon
Note: CFP 1052
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Published in Economic Theory, 21, 2003

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Related works:
Working Paper: Inside and Outside Money, Gains to Trade, and IS-LM (2001)
Working Paper: Inside and Outside Money, Gains to Trade, and IS-LM (2001)
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