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Unformatted text preview: (204A notes on OG)P.1 Diamond economy with fiat money as store of value Money stock is distributed to the old at time t=1: M units p t = Value of money in terms of goods = purchasing power (if money is not valued, means p t = 0; inverse of price level) M p t = Aggregate value of money m t = M p t / L t = Percapita money holdings of the young (end of period) a t = a t k + m t = Assets = Sum of money and claims on capital (a k ) 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: C 21 = (1 + r 1 ) a k + M / L p 1 where a is invested in capital => First generation benefits if p 1 >0.  For generations t 1: C 1 t + a t k + m t = W t and C 2 t = (1 + r t ) a t 1 k + p t p t 1 m t 1 Equilibrium condition: k t + 1 = 1 1 + n a t k (204A notes on OG)P.2 FOC for money (arbitrage condition):  For individuals to hold both money and capital, the returns on money and capital must be equal...
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This note was uploaded on 12/26/2011 for the course ECON 229 taught by Professor Bohn during the Fall '09 term at UCSB.
 Fall '09
 Bohn

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