Working Paper 312

Optimality and Monetary Equilibria in Stationary Overlapping Generations Models With Long Lived Agents: Growth Versus Discounting

S. Rao Aiyagari

Revised November 1, 1986

This paper studies the relationship between the existence and optimality of a monetary steady-state and the nonoptimality of nonmonetary steady-states. We construct a sequence of stationary overlapping generations economies with longer and longer lived generations in which all agents maximize a discounted sum of utilities with a common discount rate. Under some assumptions the following result is established: If the discount rate is greater (less) than the population growth rate, then eventually every nonmonetary steady-state is optimal (non-optimal) and a monetary steady-state does not exist (exists and is optimal).

Published In: Journal of Economic Theory (Vol. 43, No. 2, December 1987, pp. 292-313)

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