Abstract
This paper aims to inquire into an objectively authentic budget constraint in a monetary economy through showing two missing problems of the monetary budget constraint and their solutions. To start with, we show the first missing problem that money is “missing” if all agents expend their total budgets under the simple budget constraint. This problem shows that the simple budget constraint is inadequate as an objective monetary budget constraint. A deficiency of the simple budget constraint exists partly in that it does not reflect money circulation. To improve this deficiency, we incorporate the expenditure reflux formula into the simple constraint. The first missing problem is partially solved by the application of this reflux budget constraint, but another problem occurs. The new problem is that infinite expenditure is permitted under this constraint. This is the second missing problem. The second problem appears to be a variation of the solvability problem of the money circulation equation. Referring to the proof of the solvability, we incorporate a time irreversible disposal into the budget constraint. This irreversibility budget constraint brings us a provisional solution of the missing problems. However, it should not be called a perfect solution. We also examine the relationships between our research and two previous studies: the finance constraint and the cash-in-advance model.
Highlights
Much of contemporary economics is based on optimal decision making under the budget constraint
This paper has inquired into an authentic monetary budget constraint
We show that the simple budget constraint cannot avoid the first missing problem
Summary
Much of contemporary economics is based on optimal decision making under the budget constraint. Miura [2] confirms that this is equivalent to the entire reflux of the gross expenditure occurring on Agent k11 If we substitute this condition in the reflux budget constraint (Equation (4)), we obtain:. If the reflux coefficient is not equal to unity, its range is 0 ≤ εkhk < 1 by Equation (5) and the coefficient of expenditure in the reflux budget constraint (Equation (4)) is positive In this case, expenditure has its upper limit when the beginning money is finite. Taking a contraposition of this, if expenditure is infinite, money is disposed time reversibly If we apply this finding to the second missing problem, we must conclude that the reflux budget constraint permits a time reversible disposal. As is the case for the solvability problem of the money circulation equation, the second missing problem is presumed to be solved if we incorporate the disposal irreversible principle into the budget constraint. The relationships between the disposal quantities and others are summarized in the following disposal table
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