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
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
URL of the HAL notice
Version
- 1
Volume
- 45