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Welfare-improving debt constraints

Mario Pascoa, Myrian Petrassi and Juan Pablo Torres-Martinez ()

No 541, Textos para discussão from Department of Economics PUC-Rio (Brazil)

Abstract: We show that in economies without liquidity frictions, but with incomplete financial markets, when agents are infinitely lived and uniformly impatient, money can still be essential (that is, have a positive price in equilibrium) if and only if each agent has binding debt constraints at some node of her life span. That is, contrary to what might be expected, in the absence of a very productive financial market, frictions induced by debt constraints create some room for improving efficiency, by allowing money to have a role in transferring wealth across dates and states of nature.

Keywords: Cashless economies; Binding debt constraints; Fundamental value of money. (search for similar items in EconPapers)
JEL-codes: D50 D52 (search for similar items in EconPapers)
Pages: 15p
Date: 2007-03, Revised 2007-12
New Economics Papers: this item is included in nep-cba and nep-dge
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