Fiat Money Oligopolistic Economy With Labor/Leisure Trade-Off and Equilibrium Default

Abstract

We are constructing an imperfect competition general equilibrium model, with non-consumable money and labor market; our toolkit is an equilibrium default model of Shubik-Wilson (1978). Our result has an ‘equilibrium volatility’ simultaneously occurring at all three markets: labor, goods, and credit market, with a fixed money supply from a bank.

A worker and an entrepreneur strategically and simultaneously trade at the three markets. Players are uncertain about each other’s actions, and do not have a convergence of common beliefs of common knowledge. It is impossible to calculate equilibrium mixed strategies exactly, but it is possible to identify some Pareto-efficient strategies and study induced prices, wages, interest rates, default, allocations and payoffs, which are all volatile, and their fluctuations are not independent. We present an equilibrium result, when a total value of default is bigger than total money supply.

Keywords: monetary economics, fiat money, default, general equilibrium, strategic market games, imperfect competition, labor market

JEL Classification: E31, E31, E41, E51, C68, C61, C72, D58, E30, E37, G13, G14, G17, G21