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The role of overlapping-generations models in monetary economics

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  • McCallum, Bennett T.

Abstract

The main arguments of this paper can be summarized as follows. (1) The overlapping-generations (OG) structure provides a useful framework for the analysis of macroeconomic issues involving intertemporal allocation. (2) As a "model of money," the basic OG setup -- which excludes cash-in-advance or money-in-the-utility-function (MIUF) features -- is inadequate and misleading because it neglects the medium-of-exchange property that is the distinguishing characteristic of money. (3) That this neglect obtains is verified by noting that, in contrast with an axiomatic "traditional presumption," the same aggregate leisure/consumption bundles are available in equilibria in which "money" is valued and valueless. (4) That the model may be misleading is demonstrated by examples in which three of its most striking properties --tenuousness of monetary equilibrium, optimality of zero money growth, and price level invariance to open-market exchanges -- disappear in the presence of modifications designed to reflect the medium-of-exchange property. (5) There is no compelling reason why cash-in-advance, MIUF, or other appendages should not be used in conjunction with the OG framework.

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Bibliographic Info

Article provided by Elsevier in its journal Carnegie-Rochester Conference Series on Public Policy.

Volume (Year): 18 (1983)
Issue (Month): 1 (January)
Pages: 9-44

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Handle: RePEc:eee:crcspp:v:18:y:1983:i::p:9-44

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Web page: http://www.elsevier.com/locate/jme

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References

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  1. Peled, Dan, 1982. "Informational diversity over time and the optimality of monetary equilibria," Journal of Economic Theory, Elsevier, vol. 28(2), pages 255-274, December.
  2. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  3. Bennett T. McCallum, 1983. "On Non-Uniqueness in Rational Expectations Models: An Attempt at Perspective," NBER Working Papers 0684, National Bureau of Economic Research, Inc.
  4. Weiss, Laurence M, 1980. "The Effects of Money Supply on Economic Welfare in the Steady State," Econometrica, Econometric Society, vol. 48(3), pages 565-76, April.
  5. Brunner, Karl & Meltzer, Allan H, 1971. "The Uses of Money: Money in the Theory of an Exchange Economy," American Economic Review, American Economic Association, vol. 61(5), pages 784-805, December.
  6. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  7. David Cass & Menahem E. Yaari, 1965. "A Re-Examination of the Pure Consumption Loans Model," Cowles Foundation Discussion Papers 195, Cowles Foundation for Research in Economics, Yale University.
  8. Sargent, Thomas J, 1976. "A Classical Macroeconometric Model for the United States," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 207-37, April.
  9. Fischer, Stanley, 1974. "Money and the Production Function," Economic Inquiry, Western Economic Association International, vol. 12(4), pages 517-33, December.
  10. Drazen, Allan, 1978. "Government Debt, Human Capital, and Bequests in a Life-Cycle Model," Journal of Political Economy, University of Chicago Press, vol. 86(3), pages 505-16, June.
  11. Saving, Thomas R, 1971. "Transactions Costs and the Demand for Money," American Economic Review, American Economic Association, vol. 61(3), pages 407-20, June.
  12. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
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