Páscoa, Mário R. and Petrassi, Myrian and Torres-Martínez, Juan Pablo (2009): Fiat money and the value of binding portfolio constraints.
This is the latest version of this item.
Download (277kB) | Preview
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 intertemporal 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 intertemporal substitution never coincide across agents. That is, monetary equilibria are never full Pareto efficient. We also give a counter-example illustrating the occurrence of monetary bubbles under incomplete markets in the absence of uniform impatience.
|Item Type:||MPRA Paper|
|Original Title:||Fiat money and the value of binding portfolio constraints|
|Keywords:||Binding credit constraints, Fundamental value of money, Asset pricing bubbles.|
|Subjects:||C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C61 - Optimization Techniques ; Programming Models ; Dynamic Analysis
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
|Depositing User:||Juan Pablo Torres-Martínez|
|Date Deposited:||02. Nov 2009 06:08|
|Last Modified:||13. Feb 2013 15:51|
Araujo, A., J. Fajardo, and M.R. Páscoa (2005): "Endogenous collateral," Journal of Mathematical Economics, 41, 439-462.
Araujo, A., M.R. Páscoa, and J.P. Torres-Martínez (2008): "Long-lived Collateralized Assets and Bubbles," Working Paper nº 284, Department of Economics, University of Chile. Available at http://www.econ.uchile.cl
Bewley, T. (1980): "The Optimal Quantity of Money," in Models of Monetary Economics, ed. by J. Kareken and N. Wallace. Minneapolis: Federal Reserve Bank.
Clower, R. (1967): "A Reconsideration of the Microfundations of Monetary Theory," Western Economic Journal, 6, 1-9.
Giménez, E. (2007): "On the Positive Fundamental Value of Money with Short-Sale Constraints: A Comment on Two Examples," Annals of Finance, 3, 455-469.
Grandmont, J.M., and Y. Younès (1972): "On the Role of Money and the Existence of a Monetary Equilibrium," Review of Economic Studies, 39, 355-372.
Grandmont, J.M., and Y. Younès (1973): "On the Efficiency of a Monetary Equilibrium," Review of Economic Studies, 40, 149-165.
Hernández, A., and M. Santos (1996): "Competitive Equilibria for Infinite-Horizon Economies with Incomplete Markets," Journal of Economic Theory, 71, 102-130.
Hahn, F.H. (1973): "On Transaction Costs, Inessential Sequence Economies and Money", Review of Economic Studies, 40, 449-461.
Jouini, E., and H. Kallal (1995): "Arbitrage in Security Markets with Short-sales Constraints," Mathematical Finance, 5, 197-232.
Laibson, D. (1998): "Life-cycle Consumption and Hyperbolic Discount Functions," European Economic Review, 42, 861-871.
Magill, M., and M. Quinzii (1996): "Incomplete Markets over an Infinite Horizon: Long-lived Securities and Speculative Bubbles," Journal of Mathematical Economics, 26, 133-170.
Páscoa, M.R., M. Petrassi, and J.P. Torres-Martínez (2008): "Fiat Money and the Value of Binding Portfolio Constraints," Working Paper Series, 176, Banco Central do Brasil.
Rincón-Zapatero, J.P., and M. Santos (2008): "Differentiability of the Value Function without Interiority Assumptions," Journal of Economic Theory, forthcoming.
Rockafellar, R.T. (1997): ``Convex analysis," Princeton University Press, Princeton, New Jersey, USA.
Samuelson, P. (1958): "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, 66, 467-482.
Santos, M. (2006): "The Value of Money in a Dynamic Equilibrium Model," Economic Theory, 27, 39-58.
Santos, M., and M. Woodford (1997): "Rational Asset Pricing Bubbles," Econometrica, 65, 19-57.
Starret, D.A. (1973): "Inefficiency and the Demand for "Money" in a Sequence Economy," Review of Economic Studies, 40, 437-448.
Available Versions of this Item
Fiat money and the value of binding portfolio constraints. (deposited 05. Mar 2009 10:09)
- Fiat money and the value of binding portfolio constraints. (deposited 02. Nov 2009 06:08) [Currently Displayed]