Nominal uniqueness and money non-neutrality in the limit-price exchange process

Journal article: 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 expect 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.

Author(s)

Gaël Giraud, Dimitrios P. Tsomocos

Journal
  • Econometric Theory
Date of publication
  • 2010
Keywords JEL
D50 D83 E12 E24 E30 E40 E41 E50 E58
Keywords
  • Bounded rationality
  • Bank
  • Money
  • Price-quantity dynamics
  • Inside money
  • Outside money
  • Rational expectations
  • Liquidity
  • Double auction
  • Limit-price orders
  • Inflation
  • Bounded rationality
Pages
  • 303-348
Version
  • 1
Volume
  • 45