The value of money in a dynamic equilibrium model

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6 Scopus citations

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 languageEnglish (US)
Pages (from-to)39-58
Number of pages20
JournalEconomic Theory
Volume27
Issue number1
DOIs
StatePublished - Jan 1 2005
Externally publishedYes

Keywords

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

ASJC Scopus subject areas

  • Economics and Econometrics

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