An overlapping-generations model with search

Search is embedded in an overlapping-generations model. The young participate in a centralized market, and then are matched in pairs in a decentralized market. The old only participate in the centralized market. If the buyer's bargaining power in pairwise trade is close to unity and if the old are risk averse, then the golden-rule rate of money transfer is positive. Such risk aversion, the pairwise meetings, and dependence of the young's saving on the rate of return are necessary for this result.     

Non-connectedness of the set of equilibrium money prices: The overlapping-generations economy

Consider the overlapping-generations economy with nominal taxes and transfers. Under some conditions, the set of equilibrium money prices is a non-negative interval. It has not been known whether this set can consist of two or more disjoint intervals. Three examples are provided here in which the set of equilibrium money prices is a non-connected set. The examples are for a finite-horizon balanced economy, an infinite-horizon balanced economy, and an infinite-horizon non-balanced economy.     

Existence of equilibrium in an overlapping-generations model with government debt

The Diamond overlapping generations (OLG) model with government debt has been widely utilized in economics, but the existence of the steady-state equilibrium is either assumed or illustrated numerically. This paper provides easily checkable conditions for the existence and uniqueness of steady-state equilibrium in this model. By checking the first derivatives of the production and utility functions and their interactions, we can determine whether the model has a nontrivial equilibrium or not. We show that the level of government debt, production technology, individual preference, and the growth rate are important for the existence of equilibrium. If government debt exceeds a certain level, equilibrium will not exist. Given technology, preference, and the growth rate, the upper-bounds of the government debt-output ratio in equilibrium can be determined based on our results.     

Intergenerational natural-capital equality in an overlapping-generations model with logistic regeneration

Following Mourmouras [Scandinavian Journal of Economics 93 (1991): 585–591], in a Diamond [American Economic Review 55 (1965): 1126–1150] type overlapping-generations model with renewable natural resources a competitive path of manmade capital accumulation exists which meets the sustainability criterion of intergenerational natural-capital equ(al)ity (= sustainable growth). The alleged compatibility of decentralized optimization with natural-capital sustainability is appealing, but the rel-evance of this compatibility result is questionable: the growth factor of the renewable natural resource is assumed to be independent of the resource stock. Employing instead a nonlinear (logistic) regeneration function, this paper reconsiders Mourmouras' compatibility statement in another natural environment. It is shown that only under a certain complex relationship between the parameters of the utility, production, and natural-growth function does a nontrivial stationary state exist which is saddle-point stable. It exhibits by definition intergenerational natural-capital equality, but the non-linear setting precludes in general, natural-capital equality across generations on the growth path towards the stationary state.     

The theory of fiat money and private money as alternative media of exchange

A random-matching model with a clearinghouse is constructed to investigate the impact of private money on economic efficiency and social welfare in three monetary regimes. A subset of agents, called bankers, whose credit histories are recorded by the clearinghouse, are allowed to issue private banknotes in order to consume. Those private liabilities may serve as media of exchange, either by themselves, or alongside a stock of fiat money. Under certain conditions, welfare in a monetary steady state with private money is strictly higher than that attained in a steady state where private money is prohibited.     

Fertility and mortality changes in an overlapping-generations model with realistic demography

Many overlapping-generations models assume only working and retirement stages and are “not capable of representing the most basic feature of the human economic life cycle: that it begins and ends with periods of dependency, separated by a long intermediate period of consuming less than is produced” (Bommier and Lee, 2003). To examine the economic consequences of fertility and mortality changes in a common framework, we incorporate realistic demographic features into a continuous-time overlapping-generations model with childhood, adulthood and retirement stages. Using parameter values appropriate for industrial countries (such as the USA), we find that a fertility increase and a mortality decline, while both causing a rise in the population growth rate, have opposite effects on capital accumulation. We also consider simultaneous fertility and mortality changes, and find that the effect on capital accumulation of a mortality change dominates that of a fertility change.     

Existence of steady – state equium in an overlapping-generations model with production

Summary This paper establishes an existence theorem of a non-trivial (positive capital stock) steady-state equilibrium in Diamond's (1965) overlapping-generations model with production by employing the steady-state consumption curve introduced in Ihori (1978). The assumptions on preferences and production technologies that ensure the existence of a nontrivial steadystate equilibrium are separated from each other, unlike in Galor and Ryder (1989). We also provide two simple examples which illustrate the importance of two conditions in the theorem.Detailed comments by Tomoichi Shinotsuka and the referees of the journal were quite helpful. We also thank Marcus Berliant, Mark Bus, John H. Boyd III, Ban Chuan Cheah, Rajat Deb, Jim Dolmas, Oded Galor, Greg Huffman, Toshihiro Ihori, Radhika Lahiri, Lionel McKenzie, Arundhati Sen, and the seminar participants at the Midwest Mathematical Economics Conference in Ann Abor and at University of Rochester. The second author gratefully acknowledges the financial supports from the European Community Human Capital Mobility Program.     

More on money as a medium of exchange

Summary We extend the analysis of Kiyotaki and Wright, who study economies where the commodities that serve as media of exchange (or, commodity money) are determined endogenously. Kiyotaki and Wright consider only steady-state, pure-strategy equilibria; here we allow dynamic and mixed-strategy equilibria. We demonstrate that symmetric, steady-state equilibria in mixed-strategies always exist, while sometimes no such equilibria exist in pure-strategies. We prove that the number of symmetric steady-state equilibria is generically finite. We also show, however, that for some parameter values there exists a continuum of dynamic equilibria. Further, some equilibria display cycles.We thank the National Science Foundation and the University of Pennsylvania Research Foundation for financial support, as well as seminar participants at Stanford University, the London School of Economics, the Econometric Society World Congress in Barcelona, and the Conference on Monetary Theory and Financial Institutions at the Federal Reserve Bank of Minneapolis for their comments or suggestions. Alberto Trejos provided research assistance. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.     

A dynamical,pure exchange economy with feedback pricing

This paper examines a decentralized, dynamical, pure exchange economy in which changes in an individual consumers demand depend on his own consumption and on prices. An ‘instantaneous Walras law’ provides a sufficient condition for the existence of viable exchange trajectories. Such dynamic demand systems might result from goalseeking behavior of the March-Simon type, or when satisfaction of well defined preferences is continually improved through incremental adjustments in consumption. In contrast to Walrasian tâtonnement or Sinale's price adjustment model, prices in the present study follow a feedback control law that responds only to current consumer states. Various generalizations are also presented.     

The value of money in a dynamic equilibrium model

Summary. This paper studies the pricing of money in an infinite-horizon economy with heterogeneous agents, incomplete financial markets and arbitrary borrowing restrictions. Purchases of the consumption good are subject to a cash-in-advance constraint. Under general conditions I show that the price of money is equal to its fundamental value, where this value is defined over all state-price processes that are compatible with the existence of no-arbitrage opportunities. This equality implies that the cash-in-advance constraint is binding infinitely often for all agents in the economy. The analysis highlights certain differences in the determination of the price of money with respect to models with money in the utility function that bear on the optimal implementation of economic policies.Received: 23 October 2003, Revised: 26 August 2004 JEL Classification Numbers: D52, E44, G12.M.S. Santos: This paper is an outgrowth of an earlier collaboration with Michael Woodford. I have also benefitted from various discussions with Eduardo Gimenez, Alejandro Hernandez, and Miguel Iraola. Some very useful comments by an anonymous referee are greatly appreciated.     

A model of money counterfeits

This note offers a game-theoretic analysis of the strategic interaction between a central bank and a counterfeiter. Counterfeit notes cause a potential loss for consumers because such notes are confiscated when detected. The central bank is assumed to choose a bank-note design that minimizes the sum of the production cost of the notes and of the expected loss to the noncounterfeiting part of the population. The counterfeiter maximizes his expected return. I find that this game has a pure-strategy subgame-perfect equilibrium, and this equilibrium is typically unique. Depending on parameter values (specifically on the face values of notes), there is either no counterfeiting or much counterfeiting in equilibrium. Intermediate cases are never an equilibrium.     

The black market exchange rate and demand for money in sixteen developing countries

Using data for a sample of 16 diverse countries, this study tests the hypothesis that it is the black market exchange rate, not the official rate, that should enter into the demand for money function of countries where there is a black market for foreign currencies. Using several cointegration methods and Hausman tests, it is shown that this hypothesis is strongly supported for most of the countries studied.     

An error-correction approach to money demand: The case of Sudan

An empirical analysis of money demand behavior in Sudan is presented, based on the dynamic error-correction model. A theoretical basis for the model is offered, which allows an explicit, parameterized division of effects into long-run influences, short-term adjustments, and proportional equilibrium conditions. We refute previous claims that income and price effects may be abnormally high in Sudan, in part by accounting for both foreign exchange and inflationary influences.     

On the role of money in a business cycle model of a small open economy: The case of Spain

This paper examines the consequences of introducing a cash-in-advance constraint into a small open economy business cycle model for the Spanish case. A business cycle model is built extending Correia, Neves and Rebelo's (1995) small open economy framework and Cooley and Hansen's (1995) monetary economy. Money is introduced through a cash-in-advance constraint. The stochastic simulation of the model and its comparison to Spanish data show that the model is able to mimic i) the Dolado et al. puzzle, that is, the high volatility of private consumption for this economy; ii) the Dunlop-Tarshis observation, i.e., the negative correlation between real wages and hours worked; and iii) some cyclical features of the nominal dimension.     

Forecasting exchange rates: The multi-state Markov-switching model with smoothing

This paper presents an exchange rate forecasting model which combines the multi-state Markov-switching model with smoothing techniques. The model outperforms a random walk at short horizons and its superior forecastability appears to be robust over different sample spans. Our finding hinges on the fact that exchange rates tend to follow highly persistent trends and accordingly, the key to beating the random walk is to identify these trends. An attempt to link the trends in exchange rates to the underlying macroeconomic determinants further reveals that fundamentals-based linear models generally fail to capture the persistence in exchange rates and thus are incapable of outforecasting the random walk.     

Can ice cream be money?: Perishable medium of exchange

The aim of this paper is to demonstrate that a perishable good may be used as commodity money, even in economies in which perfectly durable commodities are available. This is shown in the general context of a search-theoretical model of a decentralized economy.     

The stability of the demand for money: The case of the corporate sector

Although there is general consensus on the determinants of the demand for money, the empirical performance of such money-demand equations has been unstable and poor in forecasting. In this study, the demand for money is empirically investigated on a disaggregated basis, by major sector, using Flow of Funds data, 1955i–1976iv. The results indicate that the empirical difficulties are specific to the corporate sector, that the problems in the corporate sector emerged during the later 1960s, and that foreign economic activity has become an important component in explaining holdings of cash by the corporate sector.