Handbook of Monetary Economics. Volume 1 by Benjamin M. Friedman, F.H. Hahn

By Benjamin M. Friedman, F.H. Hahn

Because of the primary two-way interplay among the theoretical and the empirical facets of financial economics, including the connection of either to concerns of public coverage, any association of fabric comprehensively spanning the topic is sure to be arbitrary. The 23 surveys commissioned for this instruction manual were prepared in a fashion that the editors suppose displays probably the most vital logical divisions in the box and jointly they current a finished account of the present state-of-the-art. The guide is an fundamental reference paintings which will be a part of each expert assortment, and which makes perfect supplementary analyzing for graduate economics scholars on complicated courses.For additional information at the Handbooks in Economics sequence, please see our domestic web page on http://www.elsevier.nl/locate/hes

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Example text

The institutional distortion that plagues sequence economy models is the sequence of budget constraints-one for each period-facing agents as they trade. In order to pay for purchases, agents who wish to buy goods in one period must sell goods in the same period and vice versa. The resolution of the inefficiency is to sever the temporal link between commodity buying and selling transactions while continuing to fulfill the sequential budget constraint. The introduction of "money" is designed to achieve this.

Sh(t) = vector of goods coming out of storage at date t. M. M. Starr 20 rt'(t) = vector of goods put into storage at date t. p,(t) = prices vector on market at date t for goods deliverable at date r. With this notation, Pit(t) is the spot price of good i at date t, and pit(t) for 7 > t is the futures price (for delivery at 7) of good i at date t. The (non-negative) consumption vector for household h is: ch(t) = o)h(t) + ~ (Xht(j)-- Zht(j)) + sh(t)-- rh(t)>--O (t= l, . . , K) . j=l (1) That is, consumption at date t is the sum of endowments phis all purchases past and present with delivery date t minus all sales for delivery at t minus transactions inputs with date t (including those previously committed) plus what comes out of storage at t minus what goes into storage.

Since we are dealing with fiat (rather than commodity) money, utility maximization will always imply zero consumption of money. We shall assume that there is a positive endowment of spot money, at least at the beginning, and that at no time is there any input of cash being used up by the transaction process. Therefore, by (1), h r~(t) - s~(t) = to0h(t) + - h • [x0,(] ) - Yot(l)] " j=l Thus, net additions to storage of cash at t equals endowment plus total net acquisitions from the market, where the total is taken over all previous transaction dates.

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