Monetary3440 - Jan 19

Monetary3440 - Jan 19 - Overlapping generations model...

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Overlapping generations model Centralized solution Golden Rule (efficiency benchmark) Decentralized Solution 1.Economy without money You cannot trade with people that are dead or people that haven’t been born yet. So you can trade with people of your own generation, but no point in trading with those guys. Other kind, currently alive old people. They want to trade with you, but we don’t want anything that they can offer. So not mutually beneficial trade, so no trade takes place. Result : (c1,c2) = (y,0): Autarkic equilibrium Introduce money: they govt. Prints money and gives it to the initial old. Given: M/N0 Trade off opportunities: if they believe that people will accept money next period supply of fiat money, people believe in money In the next period, you have no good, but you have cash, and you will use that to buy goods from young people. OGM: captures that money allows people to trade who would otherwise be unable to trade. Decentralized
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Monetary3440 - Jan 19 - Overlapping generations model...

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