Endogenous Demand for Money and Default of a Creditor

Abstract

We study a general equilibrium model of perfect competition with production and endogenous demand for fiat (or non-consumable) money (Shubik-Wilson, 1977), with workers, entrepreneurs, and a bank. Workers supply labor (Beker, 1971) and consume, entrepreneurs consume and organize production. There is no barter, and both agent types borrow money from a bank. The bank motivates borrowers to pay loans back with a punishment, which has an impact on demands for credits before a trade. The model has three markets: labor, goods, and credits. We study the results of the credit market with a numerical simulation in Maple. The model has 4 regimes, one of which corresponds to the classical money theory. Three other regimes have defaults as parts of an equilibrium.  The special feature of our model is that   it allows to study interactions of real (production and demand/supply of labor) markets with a nominal (credit) market, but also it can produce cases, when a value of default of borrowers exceeds total money supply from the bank, what become a reason for insolvency of the bank.