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

We provide a theoretical demonstration of the link between imperfect competition and the cash-in-advance constraint, not previously considered in the literature. In a general equilibrium framework, we show that imperfect competition affects the proportion of times that the cash-in-advance constraint binds. As the market becomes more competitive it is certainly no less likely that the cash-in-advance constraint will bind. Therefore, economic welfare changes not only because of the direct effect of the change in the distribution of aggregate consumption but also because of the indirect effect of the cash-in-advance constraint. Other implications are also demonstrated.