Nominal Uniqueness and Money Non-neutrality in the Limit-price Exchange Process

Giraud, Gaël and Tsomocos, Dimitrios (2010) Nominal Uniqueness and Money Non-neutrality in the Limit-price Exchange Process. Economic Theory, 45 (1-2). pp. 303-348.

Abstract

We define continuous-time dynamics for exchange economies with fiat money. Traders have locally rational expectations, face a cash-in-advance constraint, and continuously adjust their short-run dominant strategy in a monetary strategic market game involving a double-auction with limit-price orders. Money has a positive value except on optimal rest-points where it becomes a “veil” and trade vanishes. Typically, there is a piecewise globally unique trade-and-price curve both in real and in nominal variables. Money is not neutral, either in the short-run or long-run and a localized version of the quantity theory of money holds in the short-run. An optimal money growth rate is derived, which enables monetary trade curves to converge towards Pareto optimal rest-points. Below this growth rate, the economy enters a (sub- optimal) liquidity trap where monetary policy is ineffective; above this threshold inflation rises. Finally, market liquidity, measured through the speed of real trades, can be linked to gains-to-trade, households’ expectations, and the quantity of circulating money.

Item Type: Article
Keywords: Bank; money; price-quantity dynamics; inside money; outside money; rational expectations; liquidity; double auction; limit-price orders; inflation; bounded rationality; finance
Subject(s): Finance
Date Deposited: 25 Jan 2012 18:49
Last Modified: 18 Sep 2018 13:10
Funders: N/A
URI: http://eureka.sbs.ox.ac.uk/id/eprint/1849

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