Monetary Equilibrium with Missing Markets

Abstract

We consider a two-period model with missing assets and missing market links, in which money plays a central role and is linked to every instrument in the economy. If there are enough missing market links relative to the ration of outside to inside money, then monetary equilibrium (ME) exists and money has positive value. The nonexistence of GEI (of the underlying economy) shows up as a liquidity trap in terms of ME. In sharp contrast to GEI, the ME are generally determinate not only in terms of real, but also financial, variables.

Keywords: Bank, Money, Monetary equilibrium, Incomplete Markets, Inside Money, Outside Money, Liquidity Trap

JEL Classification: D50, E40, E50, E58