(204A notes on OG)-P.1Diamond economy with fiat money as store of value• Money stock is distributed to the old at time t=1: M units pt= Value of money in terms of goods = purchasing power (if money is not valued, means pt= 0; inverse of price level) M⋅pt= Aggregate value of money mt=M⋅pt/Lt= Per-capita money holdings of the young (end of period) at=atk+mt= Assets = Sum of money and claims on capital (ak) • Question: Can we find an equilibrium with positive prices for fiat money? • Budget constraints: - For the old generation in period 1, which receives fresh money: C21=(1+r1)⋅a0k+M/L0⋅p1where ais invested in capital => First generation benefits if p1>0. - For generations t≥1: C1t+atk+mt=Wtand C2t=(1+rt)⋅at−1k+ptpt−1mt−1- Equilibrium condition: kt+1=11+natk
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