Economic Theory

, Volume 45, Issue 1–2, pp 303–348 | Cite as

Nominal uniqueness and money non-neutrality in the limit-price exchange process

  • Gaël Giraud
  • Dimitrios P. Tsomocos


We define continuous-time dynamics for exchange economies with fiat money. Traders have locally rational expectations, face a cash-in-advance constraint, and continuously adjust their short-run dominant strategy in a monetary strategic market game involving a double-auction with limit-price orders. Money has a positive value except on optimal rest-points where it becomes a “veil” and trade vanishes. Typically, there is a piecewise globally unique trade-and-price curve both in real and in nominal variables. Money is not neutral, either in the short-run or long-run and a localized version of the quantity theory of money holds in the short-run. An optimal money growth rate is derived, which enables monetary trade curves to converge towards Pareto optimal rest-points. Below this growth rate, the economy enters a (sub- optimal) liquidity trap where monetary policy is ineffective; above this threshold inflation rises. Finally, market liquidity, measured through the speed of real trades, can be linked to gains-to-trade, households’ expectations, and the quantity of circulating money.


Bank Money Price-quantity dynamics Inside money Outside money Rational expectations Liquidity Double auction Limit-price orders Inflation Bounded rationality 

JEL Classification

D50 D83 E12 E24 E30 E40 E41 E50 E58 


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Copyright information

© Springer-Verlag 2009

Authors and Affiliations

  1. 1.CNRS, CERASParis School of EconomicsParisFrance
  2. 2.Saïd Business School University, St. Edmund Hall, University of Oxford & Financial Markets Group, L. S. E.LondonUK

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