On the Importance of Sequencing of Markets in Monetary Economies

Abstract

This paper studies money as working capital in a general equilibrium model. We argue that the way transactions are settled is the main determinant of the presence or lack of working capital in a cash-in-advance economy. In a production cycle, if the wage payments are made before sales proceeds are collected, firms have a financing need. This need alone brings, in a long run equilibrium, adeviation of real wages from marginal product of labor due to a 'working capital premium' in output prices. In contrast, if sales revenues can be collected before production costs are paid, then the working capital premium vanishes. These results are obtained in an economy with borrowing constraints, full equity financing, and optimal dividend policy.

Optimal money growth in a limited participation model with heterogeneous agents

“…• Just before the labor market opens, Başçı and Saglam (2003) shows that if the good market opens before the factor market, the competitive outcomes are the same as those obtained in the absence of such cash constraints. Liquidity constraints have some real effects only if the factor market opens before the good market.…”

Bertrand-Edgeworth equilibrium in a cash-in-advance economy

“…Fuerst (1992) shows in a similar cash-in-advance model where firms borrow funds to finance their wage bill that the working capital premium is linked to nominal short term interest rate, r, via p à =MC ¼ ð1 þ rÞ. Başçı and Saglam (2003) show that p à ¼ MC prevails only when firms are able to sell their goods in advance to consumers.…”

“…Proposition 1 (Başçı and Saglam, 2003) Stationary monetary competitive equilibria (SMCE) of a financially constrained economy F CE exists if and only if ð " M M 1 , " M M 2 Þ ¼ ð0, MÞ and 2 5 1. Moreover, the set of SMCE is characterized by (6)-(15):…”

“…The detailed proof is given in Başçı and Saglam (2003). Here we will discuss the nature of the equilibrium with special interest on the firm owner's problem.…”

“…As an equilibrium concept, it is natural to study the stationary monetary competitive equilibrium (SMCE) in which the production, consumption, trading, and saving decisions are, in each time period, feasible, optimal, and time invariant under the stationary competitive prices. Başçı and Saglam (2003) show that the sequencing of the markets matters for the equilibrium of such a financially constrained monetary economy. In the case where the good market opens before the labor market, SMCE exhibits the well celebrated equality of real wage and marginal product of labor and equivalently the equality of price and marginal cost.…”