Inside and Outside Fiat Money, Gains to Trade, and Is-Lm

55 Pages Posted: 16 Jul 2001

See all articles by Pradeep K. Dubey

Pradeep K. Dubey

SUNY Stony Brook - Center for Game Theory in Economics

John Geanakoplos

Yale University; Santa Fe Institute

Date Written: June 2001

Abstract

We build a one-period general equilibrium model with money. Equilibrium exists, and fiat money has positive value, as long as the ratio of outside money to inside money is less than the gains to trade available at autarky. We show that the nominal effects of government fiscal and monetary policy can be completely described by a diagram identical in form to the IS-LM curves introduced by Hicks to describe Keynes' general theory. IS-LM analysis is thus not incompatible with full market clearing, multiple commodities, and heterogeneous households. We show that as the government deficit approaches a finite threshold, hyperinflation sets in (prices converge to infinity and real trade collapses). If the government surplus is too large, the economy enters a liquidity trap in which nominal GNP sinks and monetary policy is ineffectual.

Keywords: Central Bank, Gains To Trade, Inside Money, Is-Lm, Outside Money

JEL Classification: D50, E40, E50, E58

Suggested Citation

Dubey, Pradeep K. and Geanakoplos, John D, Inside and Outside Fiat Money, Gains to Trade, and Is-Lm (June 2001). Available at SSRN: https://ssrn.com/abstract=275513

Pradeep K. Dubey

SUNY Stony Brook - Center for Game Theory in Economics ( email )

Stony Brook, NY 11794
United States
631-632-7555 (Phone)
631-632-7516 (Fax)

John D Geanakoplos (Contact Author)

Yale University ( email )

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HOME PAGE: http://https://economics.yale.edu/people/faculty/john-geanakoplos

Santa Fe Institute ( email )

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Santa Fe, NM 87501
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