Trade with a Money Market
Trade with a Money Market
The Basic Model from chapter 3 is altered in two ways. First, the trader types have unequal cash endowments. Second, there is now a money market, whereby Type 1 traders can lend money to Type 2 traders. This means that Type 2 traders have an extra constraint (a “budget constraint”) in their utility maximizations, requiring them to pay back their loans at the end of the game. Again we solve the model, but this time there are three solution zones: 1) where the traders’ cash flow constraints hold loosely; 2) where they hold tightly but the Type 2 traders’ budget constraints hold loosely; and 3) where all constraints hold tightly. We also distinguish among an “enough money well distributed,” an “enough money badly distributed,” and a “not enough money” case in this model.
Keywords: asymmetric endowments, budget constraint, coordination trap, enough money w.d. vs enough money b.d, money market
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