One of the most active and productive areas of research in the last decade is the development of rigorous microeconomic foundations for macroeconomic models dealing with such important issues as business cycles, inflation and involuntary unemployment. This project draws together several different strands of research for a new approach to the study of the microeconomic foundations of money and financial institutions. It stays as close as possible to the methodological premises of microeconomic theorizing as embodied in the Arrow Debreu model of general equilibrium. But in extending that model to allow for incomplete asset markets, and by giving a strategic market game model for the process of exchange it is able to capture the institutional context which is the hallmark of macroeconomics. Some of the specific features of the economy studied in this model are rational expectations, bankruptcy, the nature of secured loans, liquidity, the velocity of circulation, the effects of monetary policy and the different sources of money rates of interest. This project makes a major methodological contribution to economic theory by replacing partial equilibrium with general equilibrium, static with dynamic, and "institution-free" models with models that incorporate real world institutions. The research should provide new fundamental insights into the roles played by the different financial institutions in the U.S. economy.
