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Resurrecting equilibria through cycles in an overlapping generations model of money

  • Barnett, Richard C.
  • Bhattacharya, Joydeep
  • Bunzel, Helle

Momentary equilibria are defined as points that satisfy agents' optimality conditions and market clearing at any date. However, some dynamic sequences commencing from such points may not be considered valid equilibria because they asymptotically violate some economic restriction of the model. This paper studies a pure-exchange monetary overlapping generations economy in which young and old agents face exogenous minimum consumption requirements, and money is the only asset. The presence of the minimum consumption requirement on the old is shown to produce multiperiodic monetary equilibria in which real balances cycle forever between "momentary" equilibrium points (those which generate monetary sequences that potentially violate equilibrium strictures asymptotically). The novelty is to show that segments of the intergenerational offer curve that would have been deemed dynamically invalid can, in fact, be used to produce asymptotically valid cyclical paths. Indeed, a limit cycle can bestow dynamic validity on momentary equilibrium points that had erstwhile been classified as dynamically invalid.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 32 (2010)
Issue (Month): 2 (June)
Pages: 515-526

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Handle: RePEc:eee:jmacro:v:32:y:2010:i:2:p:515-526
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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  1. Lahiri, Amartya & Puhakka, Mikko, 1998. "Habit Persistence in Overlapping Generations Economies under Pure Exchange," Journal of Economic Theory, Elsevier, vol. 78(1), pages 176-186, January.
  2. Satyajit Chatterjee & B. Ravikumar & B. Ravikumar, 1997. "Minimum consumptions requirements: theoretical and quantitative implications for growth and distribution," Working Papers 97-15, Federal Reserve Bank of Philadelphia.
  3. Grandmont Jean-michel, 1983. "On endogenous competitive business cycles," CEPREMAP Working Papers (Couverture Orange) 8316, CEPREMAP.
  4. Bullard, James & Duffy, John, 1998. "Learning And The Stability Of Cycles," Macroeconomic Dynamics, Cambridge University Press, vol. 2(01), pages 22-48, March.
  5. Aguiar-Conraria, Luis & Shell, Karl, 2006. "Capital Gains," Working Papers 06-02, Cornell University, Center for Analytic Economics.
  6. Luca Bossi & Pere Gomis-Porqueras, 2008. "Consequences of Modeling Habit Persistence," Working Papers 0701, University of Miami, Department of Economics.
  7. Michele Boldrin & Michael Woodford, 1988. "Equilibruim Models Displaying Endogenous Fluctuations and Chaos: A Survey," UCLA Economics Working Papers 530, UCLA Department of Economics.
  8. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, June.
  9. Bunzel, Helle, 2006. "Habit Persistence, Money, and Overlapping Generations," Staff General Research Papers 12405, Iowa State University, Department of Economics.
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