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

Pradeep Dubey and J. Geanakoplos

Department of Economics Working Papers from Stony Brook University, Department of Economics

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.

JEL-codes: D50 E40 E50 E58 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2001
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://www.stonybrook.edu/commcms/economics/research/papers/2001/01-08.pdf (application/pdf)

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 (2000)
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:nys:sunysb:01-08

Access Statistics for this paper

More papers in Department of Economics Working Papers from Stony Brook University, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by ().