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Nominal uniqueness and money non-neutrality in the limit-price exchange process

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Abstract

We define continuous-time dynamics for exchange economies with fiat money. Traders have locally rational expectations, face a cash-in-advance constraint, and continuously adjust their short-run dominant strategy in a monetary strategic market game involving a double-auction with limit-price orders. Money has a positive value except on optimal rest-points where it becomes a “veil” and trade vanishes. Typically, there is a piecewise globally unique trade-and-price curve both in real and in nominal variables. Money is not neutral, either in the short-run or long-run and a localized version of the quantity theory of money holds in the short-run. An optimal money growth rate is derived, which enables monetary trade curves to converge towards Pareto optimal rest-points. Below this growth rate, the economy enters a (sub- optimal) liquidity trap where monetary policy is ineffective; above this threshold inflation rises. Finally, market liquidity, measured through the speed of real trades, can be linked to gains-to-trade, households’ expectations, and the quantity of circulating money.

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Authors and Affiliations

  1. CNRS, CERAS, Paris School of Economics, Paris, France

    Gaël Giraud

  2. Saïd Business School University, St. Edmund Hall, University of Oxford & Financial Markets Group, L. S. E., London, UK

    Dimitrios P. Tsomocos

Authors
  1. Gaël Giraud
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  2. Dimitrios P. Tsomocos
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Correspondence to Gaël Giraud.

Additional information

We are grateful to seminar participants at the 1st Annual Caress-Cowles Conference on General Equilibrium and its Applications, New Haven, the General Equilibrium Workshop, Zürich, the University of Strasburg and Paris-1, and especially J.-M. Bonnisseau, B. Cornet, J. Geanakoplos, A. Mas-Colell and H. Polemarchakis for helpful comments. All remaining errors are ours. An earlier version of this paper was circulated under a different title, see Giraud and Tsomocos (2004).

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Giraud, G., Tsomocos, D.P. Nominal uniqueness and money non-neutrality in the limit-price exchange process. Econ Theory 45, 303–348 (2010). https://doi.org/10.1007/s00199-009-0507-4

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