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Myopia and monetary equilibria

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  • Lovo, Stefano
  • Polemarchakis, Herakles
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    Abstract

    In an infinitely lived, representative individual economy, important properties of competitive equilibria, such as determinacy and the non-existence of monetary equilibria, are not robust to the introduction of myopia. An individual is myopic if, at each date, he plans consumption only for that date and few periods that immediately follow; that is, his planning horizon, n, is finite. Equilibria with myopia can display real indeterminacy and allow for monetary as well as non-monetary steady states; thus, they share some of the features of equilibria in economies of overlapping generation. The equilibrium price dynamics (but not the consumption dynamics) of an exchange economy with extreme myopia, n = 1, are identical to the dynamics of an overlapping generation economy with two-period lives.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Mathematical Economics.

    Volume (Year): 46 (2010)
    Issue (Month): 5 (September)
    Pages: 925-936

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    Handle: RePEc:eee:mateco:v:46:y:2010:i:5:p:925-936

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

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    Keywords: Infinitely lives individuals Myopia Overlapping generations;

    References

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    1. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
    2. Ted O' Donoghue and Matthew Rabin., 2000. "Choice and Procrastination," Economics Working Papers E00-281, University of California at Berkeley.
    3. Aiyagari, S Rao, 1989. "Can There Be Short-Period Deterministic Cycles When People Are Long Lived?," The Quarterly Journal of Economics, MIT Press, vol. 104(1), pages 163-85, February.
    4. Woodford, Michael, 1986. "Stationary sunspot equilibria in a finance constrained economy," Journal of Economic Theory, Elsevier, vol. 40(1), pages 128-137, October.
    5. Grandmont, Jean-Michel, 1977. "Temporary General Equilibrium Theory," Econometrica, Econometric Society, vol. 45(3), pages 535-72, April.
    6. Huo, Teh M., 1987. "Observational equivalence of the overlapping-generations and the cash-in-advance economies," Economics Letters, Elsevier, vol. 25(1), pages 9-13.
    7. Dana, Rose Anne, 1993. "Existence and Uniqueness of Equilibria When Preferences Are Additively Separable," Econometrica, Econometric Society, vol. 61(4), pages 953-57, July.
    8. 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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