The Permanent Income–Life Cycle Hypothesis in a Monetary Economy and the Neutrality of Money: A Continuous‐Time Analysis

Hiroaki Hayakawa

The Japanese Economic Review, 2001, vol. 52, issue 1, 77-92

Abstract: This paper addresses the viability of the permanent income– life cycle hypothesis in a monetary economy in which money enters the utility function of infinitely lived agents. Two forms of the hypothesis are distinguished: weak and strong. Deriving the Keynes–Ramsey rule of consumption under preferences of the Uzawa–Epstein recursive class and examining the optimal consumption–wealth relation, the paper studies the restrictions that these forms impose on the utility functional, identifies the necessary and sufficient conditions for the hypothesis to hold, and clarifies how such conditions are related to the neutrality of money. JEL Classification Numbers: D91, E21, E40, C61.

Date: 2001
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