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The Real Value of Money under Endogenous Beliefs

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  • Bertocchi Graziella
  • Wang Yong

Abstract

We study an overlapping generations model where the probability that money can lose its value is an endogenous function of the level of aggregate real money balances. The economy can display multiple stationary equilibria where the aggregate bubble on money is stochastic and the level of confidence is partial. Furthermore, steady states can be ranked by the degree of confidence, with more inefficiency being associated with less confidence. It is only under restrictive assumptions that the Golden Rule monetary steady state, which is associated with a deterministic bubble and full confidence in the value of money, constitutes a steady state for the system ; in addition, under gross substitutability, this steady would be always unstable.
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Suggested Citation

  • Bertocchi Graziella & Wang Yong, 1995. "The Real Value of Money under Endogenous Beliefs," Journal of Economic Theory, Elsevier, vol. 67(1), pages 205-222, October.
    • Handle: RePEc:eee:jetheo:v:67:y:1995:i:1:p:205-222
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    Cited by:

    1. Hashimoto, Ken-ichi & Im, Ryonghun & Kunieda, Takuma & Shibata, Akihisa, 2022. "Financial destabilization," Journal of Mathematical Economics, Elsevier, vol. 103(C).
    2. Cetorelli, Nicola, 2002. "Could Prometheus be bound again? A contribution to the convergence controversy," Journal of Economic Dynamics and Control, Elsevier, vol. 27(1), pages 29-50, November.
    3. Kunieda, Takuma & Shibata, Akihisa, 2012. "Asset bubbles, economic growth, and a self-fulfilling financial crisis: a dynamic general equilibrium model of infinitely lived heterogeneous agents," MPRA Paper 37309, University Library of Munich, Germany.
    4. Eduardo Giménez, 2007. "On the positive fundamental value of money with short-sale constraints," Annals of Finance, Springer, vol. 3(4), pages 455-469, October.

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