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Debt, Liquidity and Dynamics

By H. M. Polemarchakis and Céline Rochon


Money, which provides liquidity services, is distinct from debt. The introduction of a bank that issues money in exchange for debt and pays out its profit as dividend to shareholders modifies the model of overlapping generations. The set of equilibrium paths, their dynamic properties, as well as the scope and effec- tiveness of monetary policy are significantly altered: (1) there is a continuum of pareto comparable steady state paths, indexed by the nominal rate of interest; (2) monetary policy, which is effective, can set, alternatively, the nominal rate of interest, the circulation of real balances or the rate of inflation; and (3) though low rates of interest are associated with superior steady state allocations, they may account for unstable steady states or stable endogenous cycles

Topics: Key words, money, liquidity, debt, overlapping generations, dynamics
Year: 1999
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