Theoretical Foundations

Abstract

It will suffice for our purpose to restrict one’s attention to the simpler case of an exchange economy. Introduction of a production sector would unnecessarily complicate the notation without adding any insight into the model. There are N non-monetary commodities, indexed n = 1, 2, … , N. Commodity 0 is money which is the sole medium of exchange : “money buys goods and goods buy money; but goods do not buy goods” (Clower (1967)). This allows the assimilation of goods and markets : on market n, commodity n is exchanged against money. There are only N markets and no market for money which will never be rationed. Money is the sole store of value and acts as a buffer stock. It is always desired. If we normalize the price of money to one, the price vector can be represented by (1,p) where${\text{p}} \in {\text{R}}_ + ^{\text{N}}$ is the vector of prices of non-monetary commodities.