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Global Uniqueness and Money Non-neutrality in a Walrasian Dynamics without Rational Expectations

Gaël Giraud () and Dimitrios Tsomocos

OFRC Working Papers Series from Oxford Financial Research Centre

Abstract: We define a non-tâtonnement dynamics in continuous-time for pure exchange economies with outside and inside fiat money. Traders are myopic, face a cash-in-advance constraint, and play dominant strategies in a short-run monetary strategic market game involving the limit-price mechanism. The profits of the Bank are redistributed to its private shareholders, but they can use them to pay their own debts in the next period. Provided there is enough inside money, monetary trade curves converge towards Pareto optimal allocations; money has a positive value along each trade curve (except on the optimal rest-point where it becomes a veil while trades vanish), and is neutral in the short-run. Moreover, generically, given initial conditions, there is a piecewise globally unique trade-and-price curve not only in real, but also in nominal variables. Finally, is not neutral in the long-run.

Date: 2004
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