### Abstract

This paper studies the pricing of money in an infinite-horizon economy with heterogeneous agents, incomplete financial markets and arbitrary borrowing restrictions. Purchases of the consumption good are subject to a cash-in-advance constraint. Under general conditions I show that the price of money is equal to its fundamental value, where this value is defined over all state-price processes that are compatible with the existence of no-arbitrage opportunities. This equality implies that the cash-in-advance constraint is binding infinitely often for all agents in the economy. The analysis highlights certain differences in the determination of the price of money with respect to models with money in the utility function that bear on the optimal implementation of economic policies.

Original language | English (US) |
---|---|

Pages (from-to) | 39-58 |

Number of pages | 20 |

Journal | Economic Theory |

Volume | 27 |

Issue number | 1 |

DOIs | |

State | Published - Jan 2005 |

Externally published | Yes |

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### Keywords

- Borrowing limits
- Cash-in-advance
- Fundamental value
- Incomplete financial markets
- Pricing by arbitrage

### ASJC Scopus subject areas

- Economics and Econometrics

### Cite this

**The value of money in a dynamic equilibrium model.** / Santos, Manuel.

Research output: Contribution to journal › Article

*Economic Theory*, vol. 27, no. 1, pp. 39-58. https://doi.org/10.1007/s00199-004-0552-y

}

TY - JOUR

T1 - The value of money in a dynamic equilibrium model

AU - Santos, Manuel

PY - 2005/1

Y1 - 2005/1

N2 - This paper studies the pricing of money in an infinite-horizon economy with heterogeneous agents, incomplete financial markets and arbitrary borrowing restrictions. Purchases of the consumption good are subject to a cash-in-advance constraint. Under general conditions I show that the price of money is equal to its fundamental value, where this value is defined over all state-price processes that are compatible with the existence of no-arbitrage opportunities. This equality implies that the cash-in-advance constraint is binding infinitely often for all agents in the economy. The analysis highlights certain differences in the determination of the price of money with respect to models with money in the utility function that bear on the optimal implementation of economic policies.

AB - This paper studies the pricing of money in an infinite-horizon economy with heterogeneous agents, incomplete financial markets and arbitrary borrowing restrictions. Purchases of the consumption good are subject to a cash-in-advance constraint. Under general conditions I show that the price of money is equal to its fundamental value, where this value is defined over all state-price processes that are compatible with the existence of no-arbitrage opportunities. This equality implies that the cash-in-advance constraint is binding infinitely often for all agents in the economy. The analysis highlights certain differences in the determination of the price of money with respect to models with money in the utility function that bear on the optimal implementation of economic policies.

KW - Borrowing limits

KW - Cash-in-advance

KW - Fundamental value

KW - Incomplete financial markets

KW - Pricing by arbitrage

UR - http://www.scopus.com/inward/record.url?scp=17444381617&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=17444381617&partnerID=8YFLogxK

U2 - 10.1007/s00199-004-0552-y

DO - 10.1007/s00199-004-0552-y

M3 - Article

AN - SCOPUS:17444381617

VL - 27

SP - 39

EP - 58

JO - Economic Theory

JF - Economic Theory

SN - 0938-2259

IS - 1

ER -