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.
In: Economic Theory, Vol. 27, No. 1, 01.2005, p. 39-58.Research output: Contribution to journal › Article
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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
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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 -