Pages: 19 (4506 mots) Publié le: 22 février 2011
Integration of
Market Exchange and Money Circulation

Gang Gong*

March, 1995

I want to thank Edward Nell, David Colander, John Eatwell and Thomas Palley for their comments and suggestions on the early draft of paper.

Integration of Market Exchange and Money Circulation

Money as a medium of exchange is circulated along with market exchanges. Theprocess of market exchanges can be viewed as a sequence of trades with the starting point to be an autonomous demand. Money in this process is naturally integrated with the proceeding of market exchanges. Its circulation is now closed, continuous and dynamics. This further provides some implications to post Keynesian macroeconomics.

Much study on monetary economics follows theWalras-Hicks-Patinkin tradition to treat money as a stock. Typically, the demand-supply principle is used to determine the money stock equilibrium along with the commodity equilibrium. However, money as a medium of exchange is also a flow. It is circulated among different agents. In economics literature, there is also a circulation approach that follows Wicksell's tradition to study the macroeconomic operation basedon the circulation of money.[1]
Wicksell's tradition does not provide much micro-insides of money circulation. Money as a medium of exchange is circulated along with the proceeding of market exchanges, and therefore the study on money circulation should be integrated with the study on the trading process. Without concerning its macroeconomic implication, attempts, with vary degree of success,have also been made to formalize the money circulation along with a trading process. Such a tradition follows the pioneer works by Ostroy (1973) and Ostroy and Starr (1974). The trading is supposed to be decentralized, sequential and executed in pairs. Recently, Diamond's "search process" (Diamond 1982, 1984) is often used to formalize this idea.[2]
This paper presents my own contribution tothe subject of money circulation. Along the line of Ostroy-Starr-Diamond, I first consider a market exchange process that might be called the "multiplier" process presented in (Gong,, 1995). This process shares many similar properties as in those search models, except perhaps only the starting point. It has been known that the starting point of a search process is often unclear, and thereforeexchanges are executed often in a disordered and random fashion.[3] In the multiplier process, the starting point is further specified and therefore exchanges proceed orderly.
I will show that such a trading process is naturally integrated with a process of money circulation and satisfies Clower's "cash in advance" constraint (Clower, 1967). By this inward-looking of money circulation, I then canshow how outwardly money is circulated among different types of agents.[4] One will find that the money circulation is now closed, continuous and dynamics. Finally, the implication to the some issues in post Keynesian macroeconomics will be discuessed in this context.

The Necessity of a Special Trader
Suppose the mythical auctioneer had adjusted all necessary prices to their equilibrium andhence stepped down from his stage. It now remains for the trade to be executed. At that moment, traders are supposed to possess the information, given by the auctioneer, how much they should supply and how much they can demand at the equilibrium price. To whom should they supply, and from whom should they demand? These are the problems with which the aforementioned models of trading processusually start. However even if traders have found their partners, a problem still remains.
To see this issue, let's take Wicksell's famous ABC example (Wicksell, 1936, ch. 3) in which, commodity A is known to be desired by the owner of commodity B, B by the owner of commodity C, and C by the owner of A. Who should pay out first before he receives the money from other traders? For a regular...
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