Fiat money and the value of binding portfolio constraints

Mário Páscoa, Myrian Petrassi, Juan Pablo Torres-Martínez

Research output: Contribution to journalArticlepeer-review

8 Citations (Scopus)


We establish necessary and sufficient conditions for the individual optimality of a consumption-portfolio plan in an infinite horizon economy where agents are uniformly impatient and fiat money is the only asset available for intertemporal transfers of wealth. Next, we show that fiat money has a positive equilibrium price if and only if for some agent the zero short sale constraint is binding and has a positive shadow price (now or in the future). As there is always an agent that is long, it follows that marginal rates of intertemporal substitution never coincide across agents. That is, monetary equilibria are never full Pareto efficient. We also give a counter-example illustrating the occurrence of monetary bubbles under incomplete markets in the absence of uniform impatience.
Original languageEnglish
Pages (from-to)189-209
JournalEconomic Theory
Issue number2
Publication statusPublished - 1 Jan 2009


  • Binding portfolio constraints
  • Fundamental value of money
  • Asset pricing bubbles


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