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The Real Value of Money under Endogenous Beliefs

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  • Bertocchi, Graziella

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics ; Brown University, Department of Economics)

  • Wang, Yong

    (Virginia Polytechnic Institute and State University, Department of Economics)

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.

Suggested Citation

  • Bertocchi, Graziella & Wang, Yong, 1991. "The Real Value of Money under Endogenous Beliefs," LIDAM Discussion Papers IRES 1992006, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    • Handle: RePEc:ctl:louvir:1992006
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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. 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.
    3. 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.
    4. 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.

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