A STRATEGIC MARKET GAME WITH SECURED LENDING

We study stationary Markov equilibria for strategic, competitive games , in a market-economy model with one non-durable commodity, fiat money , borrowing/lending through a central bank or a money market, and a co ntinuum of agents. These Use fiat money in order to offset random fluc tuations in their endowments of the commodity, are not allowed to borr ow more than they can pay back (secured lending), and maximize expecte d discounted utility from consumption of the commodity. Their aggregat e optimal actions determine dynamically prices and/or interest rates f or borrowing and lending, in each period of play. In equilibrium, rand om fluctuations in endowment levels and wealth-levels offset each othe r, and prices and interest rates remain constant. As in related recent work, we study in detail the individual agents' dynamic optimization problems, and the invariant measures for the associated, optimally con trolled Markov chains. By appropriate aggregation, these individual pr oblems lead to the construction of a stationary Markov competitive equ ilibrium for the economy as a whole. Several examples are studied in d etail, fairly general existence theorems are established, and open que stions are indicated for further research.