OLG_Money_SL

OLG_Money_SL - Money in OLG Prof. Lutz Hendricks September...

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Unformatted text preview: Money in OLG Prof. Lutz Hendricks September 2, 2009 L. Hendricks () Money in OLG September 2, 2009 1 / 32 Money in OLG Models We study the value of money in OLG models. We develop an important model of money. The model can be used to price other assets. L. Hendricks () Money in OLG September 2, 2009 2 / 32 Monetary Economics The central question of monetary economics: Why and when is money valued in equilibrium? By money we mean bits of green paper with pictures of dead presidents. L. Hendricks () Money in OLG September 2, 2009 3 / 32 Monetary Economics Rate of return dominance is a problem: Why would anyone hold money in the presence of other assets that o/er a higher rate of return? The answer of the OLG model: Money is a bubble . Its value derives solely from the expectation that money will be valued tomorrow. It is only valued if no other asset o/ers a higher rate of return. L. Hendricks () Money in OLG September 2, 2009 4 ¡ 32 Monetary Economics Can money alleviate dynamic ine¢ ciency ? Previous models lacked a long-lived asset that would facilitate intergenerational trade. Money could solve this problem. L. Hendricks () Money in OLG September 2, 2009 5 / 32 An OLG Model of Money Start with the standard two period OLG model without production or bonds. The population grows at rate n . Money is introduced as follows. In period 1, the initial old are given M bits of green paper In every subsequent period, the government prints additional paper and hands it to the current old in proportion to current paper holdings. E/ectively, money pays (nominal) interest if held from young to old age. The money growth rate is constant: M t + 1 / M t = 1 + θ L. Hendricks () Money in OLG September 2, 2009 6 ¡ 32 Timing Beginning of t : N t young are born and receive e 1 goods. N t & 1 old receive e 2 goods carry over M t & 1 / N t & 1 units of money receive money transfer θ M t & 1 / N t & 1 . L. Hendricks () Money in OLG September 2, 2009 7 / 32 Timing During t the young sell goods to the old the old sell money to the young At the end of t : the young hold M t L. Hendricks () Money in OLG September 2, 2009 8 / 32 Household This is a standard two period household problem with endowments....
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This note was uploaded on 10/29/2009 for the course ECON 720 at UNC.

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OLG_Money_SL - Money in OLG Prof. Lutz Hendricks September...

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