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Debt, liquidity and dynamics

  • POLEMARCHAKIS, Heracles M.

    (Center for Operations Research and Econometrics (CORE), Université catholique de Louvain (UCL), Louvain la Neuve, Belgium)

  • ROCHON, Céline

    (Center for Operations Research and Econometrics (CORE), Université catholique de Louvain (UCL), Louvain la Neuve, Belgium)

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    Money, which provides liquidity services, is distinct from debt. The introduction of a bank that issues money in exchange for debt and pays 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: (1) there is a continuum of pareto comparable steady state paths, indexed by the nominal rate of interest; (2) monetary policy, which is effective, can set, alternatively, the nominal rate of interest, the circulation of real balances or the rate of inflation; and (3) though low rates of interest are associated with superior steady state allocations, they may account for unstable steady states or stable endogenous cycles.

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    Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 1999034.

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    Date of creation: 01 Jun 1999
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    Handle: RePEc:cor:louvco:1999034
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