The value of money in a dynamic equilibrium model

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. Copyright Springer-Verlag Berlin/Heidelberg 2006Cash-in-advance, Incomplete financial markets, Borrowing limits, Pricing by arbitrage, Fundamental value.,

On the positive fundamental value of money with short-sale constraints

“…11 Yet, few exceptions have examined the conditions under which asset-pricing bubbles may or may not exist in restricted environments. 12 Finally, it should be noted that a distinctive feature of money-pricing is that the value of the intangible monetary returns depends likewise on the path of all sequences of (present and future) prices of money, which has been stressed as a major source of multiplicity in monetary equilibria (Santos 2006) as well as for market fundamentals of money (Tirole 1985(Tirole , p. 1516. This paper will show a related source of multiplicity for the fundamental value of money comes from the (technical) incompleteness of financial markets since several schemes of discounting are possible, representing the variety of motives for demanding money, namely the bubbly view or the fundamentalist view for giving value to money.…”

“…5). 12 SeeKocherlakota (1992),Magill and Quinzii (1996),Santos and Woodford (1992, 1996),Giménez-Fernández (1996),Giménez (1998),Montrucchio (2004) andSantos (2006).…”

“…See alsoSantos and Woodford (1992, 1996), andSantos (2006).9 A usual definition for the fundamental value of a security, i.e., the present value of the "buy-andhold" portfolio strategy involving such an asset, may not be appropriated for securities that play a role in the trading process and provide non-speculative services. 10 For example, whenever the discounted value of the resources is infinite, as in the overlapping generations monetary models ofSamuelson (1958),Wallace (1980), or Tirole (1985.11 The former has been looked at for different monetary services, such as liquidity services(Svens- son 1985, Santos and Woodford 1992, Sect.…”

“…10 For example, whenever the discounted value of the resources is infinite, as in the overlapping generations monetary models ofSamuelson (1958),Wallace (1980), or Tirole (1985.11 The former has been looked at for different monetary services, such as liquidity services(Svens- son 1985, Santos and Woodford 1992, Sect. 4, 1996Santos 2006), trading time savings(Tirole 1985, Sect. 6), reserve requirements services(Giménez-Fernández 1996, Giménez 1998, or short-sale services(Santos and Woodford 1992, Sect.…”

On imperfect competition with occasionally binding cash-in-advance constraints

“…Since t > when t 2 B, for a given technology level, a nonbinding equilibrium Pareto dominates a binding equilibrium in terms of welfare for both …rm-owners and household- 34 If g M t+2 < 1, the positivity of money supply will be violated.…”