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Debt, liquidity and dynamics

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  • Céline Rochon

    ()

  • Herakles Polemarchakis

    ()

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    Abstract

    Money, which provides liquidity, is distinct from debt. The introduction of a bank that issues money in exchange for debt and pPolemarchakisays out its profit as dividend to shareholders modifies the model of overlapping generations. The set of equilibrium paths, their dynamic properties, as well as the scope and effectiveness of monetary policy are significantly altered: though low rates of interest are associated with superior steady state allocations, stability of the steady state may require a nominal rate of interest above a certain minimum: without production, a decrease in the nominal rate of interest may result in explosive behavior or convergence to an endogenous cycle, while in an economy with production, an increase in the nominal rate of interest may lead to indeterminacy and fluctuations. Copyright Springer-Verlag Berlin/Heidelberg 2006

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    Bibliographic Info

    Article provided by Springer in its journal Economic Theory.

    Volume (Year): 27 (2006)
    Issue (Month): 1 (01)
    Pages: 179-211

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    Handle: RePEc:spr:joecth:v:27:y:2006:i:1:p:179-211

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    Related research

    Keywords: Overlapping generations; Money; Liquidity constraints; Debt; Dynamics.;

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    Cited by:
    1. Kunieda, Takuma, 2008. "Asset bubbles and borrowing constraints," Journal of Mathematical Economics, Elsevier, vol. 44(2), pages 112-131, January.
    2. Real Arai & Takuma Kunieda & Keigo Nishida, 2014. "Is Public Debt Growth-Enhancing or Growth-Reducing?," KIER Working Papers 884, Kyoto University, Institute of Economic Research.
    3. Hillebrand, Marten & Kikuchi, Tomoo, 2012. "A mechanism for booms and busts in housing prices," Working Paper Series in Economics 40, Karlsruhe Institute of Technology (KIT), Department of Economics and Business Engineering.
    4. Kunieda, Takuma, 2008. "Finance and Growth Cycles," MPRA Paper 11340, University Library of Munich, Germany.
    5. Kunieda, Takuma & Shibata, Akihisa, 2011. "Endogenous Growth and Fluctuations in an Overlapping Generations Economy with Credit Market Imperfections," MPRA Paper 35698, University Library of Munich, Germany.
    6. Hippolyte D'Albis & Emmanuelle Augeraud-Véron, 2007. "Balanced cycles in an OLG model with a continuum of finitely-lived individuals," Post-Print hal-00630229, HAL.

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