Money and Production, and Liquidity Trap

Abstract

We prove the existence of monetary equilibrium in a finite horizon economy with production. We also show that if agents expect the monetary authority to significantly decrease the supply of bank money available for short term loans in the future, then the economy will fall into a liquidity trap today.

Keywords: Central bank, Inside money, Outside money, Incomplete assets, Production, Monetary equilibrium, Liquidity, Liquidity trap

JEL Classification: D50, D51, D52, D53, D58, D60, E12, E31, E32, E41