Fiat money and the value of binding portfolio constraints

Abstract

Abstract. We establish necessary and sufficient conditions for the individual optimality of a consumption-portfolio plan in an infinite horizon economy where agents are uniformly impatient and fiat money is the only asset available for inter-temporal transfers of wealth. Next, we show that fiat money has a positive equilibrium price if and only if for some agent the zero short sale constraint is binding and has a positive shadow price (now or in the future). As there is always an agent that is long, it follows that marginal rates of inter-temporal substitution never coincide across agents. That is, monetary equilibria are never full Pareto efficient. We also give a counterexample illustrating the occurrence of monetary bubbles under incomplete markets in the absence of uniform impatience.

Intertemporal equilibrium with heterogeneous agents, endogenous dividends and collateral constraints

“…We contribute to explain the asset pricing in terms of production activity. Although many papers have raised the question of asset valuation, most of them have focused on assets with exogenous positive dividends (Lucas, 1978;Santos and Woodford, 1997) or zero dividend (Bewley, 1980;Tirole, 1985;Pascoa et al, 2011). Unlike this literature, in our paper, every agent can use the asset to produce the consumption good according to her own technology.…”

“…In this case, the land in our model can be interpreted as fiat money in Bewley (1980), Santos and Woodford (1997), Pascoa et al (2011) where they provide some examples where the fiat money price is strictly positive. Our contribution concerns the existence of bubble of assets with positive and endogenous dividends.…”

“…The concept of i−bubble is closely related to bubbles of durable goods and collateralized assets in or bubble of fiat money in Pascoa et al (2011). Given an equilibrium, provide asset-pricing conditions (Corollary 1, page 263) based on the existence of what they call deflators and non-pecuniary returns which are not necessarily unique.…”

“…Among others, three approaches deserve mention. , Pascoa et al (2011) introduce and study concepts of bubbles of durable goods, collateralized assets and fiat money. They provide asset-pricing conditions based on the existence of so-called deflators and non-pecuniary returns; then, they use them to define bubbles.…”

“…The challenge and key point is the necessity of transversality conditions. To prove this, we develop the methods in Kamihigashi (2002) and , Pascoa et al (2011). Our necessary and sufficient condition allows us to check whether a sequence is an equilibrium or not.…”