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Debt, liquidity and dynamics

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    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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    Paper provided by Brown University, Department of Economics in its series Working Papers with number 2001-22.

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    Date of creation: 2001
    Handle: RePEc:bro:econwp:2001-22
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    Department of Economics, Brown University, Providence, RI 02912

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    1. Detemple, J. & Gottardi, P. & Polemarchakis, H. M., 1995. "The relevance of financial policy," European Economic Review, Elsevier, vol. 39(6), pages 1133-1154, June.
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    8. Grandmont Jean-michel, 1983. "On endogenous competitive business cycles," CEPREMAP Working Papers (Couverture Orange) 8316, CEPREMAP.
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    10. POLEMARCHAKIS, Heracles M. & SICONOLFI, Paolo, "undated". "Prices, asset markets and indeterminacy," CORE Discussion Papers RP 1331, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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    13. J. D. Geanakoplos & H. M. Polemarchakis, 1986. "Walrasian Indeterminacy and Keynesian Macroeconomics," Review of Economic Studies, Oxford University Press, vol. 53(5), pages 755-779.
    14. POLEMARCHAKIS, Heracles & SICONOLFI, Paolo, "undated". "Asset markets and the information revealed by prices," CORE Discussion Papers RP 1061, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    15. William Poole, 1970. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Staff Studies 57, Board of Governors of the Federal Reserve System (U.S.).
    16. Cass, David, 1972. "On capital overaccumulation in the aggregative, neoclassical model of economic growth: A complete characterization," Journal of Economic Theory, Elsevier, vol. 4(2), pages 200-223, April.
    17. Balasko, Yves & Cass, David & Siconolfi, Paolo, 1990. "The structure of financial equilibrium with exogenous yields : The case of restricted participation," Journal of Mathematical Economics, Elsevier, vol. 19(1-2), pages 195-216.
    18. POLEMARCHAKIS, Heracles M. & SECCIA, Giulio, "undated". "A role for monetary policy when prices reveal information: an example," CORE Discussion Papers RP 1479, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    19. Jean-Michel Grandmont & Yves Younes, 1973. "On the Efficiency of a Monetary Equilibrium," Review of Economic Studies, Oxford University Press, vol. 40(2), pages 149-165.
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    21. Benveniste, Lawrence & Gale, David, 1975. "An extension of Cass' characterization of infinite efficient production programs," Journal of Economic Theory, Elsevier, vol. 10(2), pages 229-238, April.
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    24. James Tobin, 1955. "A Dynamic Aggregative Model," Journal of Political Economy, University of Chicago Press, vol. 63, pages 103-103.
    25. DREZE, Jacques H., "undated". "Existence of an exchange equilibrium under price rigidites," CORE Discussion Papers RP 225, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    26. Azariadis, Costas, 1981. "Self-fulfilling prophecies," Journal of Economic Theory, Elsevier, vol. 25(3), pages 380-396, December.
    27. Benhabib, Jess & Day, Richard H., 1982. "A characterization of erratic dynamics in, the overlapping generations model," Journal of Economic Dynamics and Control, Elsevier, vol. 4(1), pages 37-55, November.
    28. Wilson, Charles A., 1981. "Equilibrium in dynamic models with an infinity of agents," Journal of Economic Theory, Elsevier, vol. 24(1), pages 95-111, February.
    29. Jayasri Dutta & Sandeep Kapur, 1998. "Liquidity Preference and Financial Intermediation," Review of Economic Studies, Oxford University Press, vol. 65(3), pages 551-572.
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