Nominal uniqueness and money non-neutrality in the limit-price exchange process |
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Authors: | Ga?l Giraud Dimitrios P Tsomocos |
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Institution: | 1. CNRS, CERAS, Paris School of Economics, Paris, France 2. Sa?d Business School University, St. Edmund Hall, University of Oxford & Financial Markets Group, L. S. E., London, UK
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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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