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Resurrecting Equilibria Through Cycles

Richard Barnett (), Joydeep Bhattacharya () and Helle Bunzel

Economics Working Papers from Department of Economics and Business Economics, Aarhus University

Abstract: In an overlapping generations model, momentary equilibria are defined as points that lie on the intergenerational offer curve, i.e., they satisfy agents’ optimality conditions and market clearing at any date. However, some dynamic sequences commencing from such points may not be considered valid equilibria because they asymptotically violate some economic restriction of the model. The literature has always ruled out such paths. This paper studies a pure-exchange monetary overlapping generations economy in which real balances cycle forever between momentary equilibrium points. The novelty is to show that segments of the offer curve that have been previously ignored, can in fact be used to produce asymptotically valid cyclical paths. Indeed, a cycle can bestow dynamic validity on momentary equilibrium points that had erstwhile been classified as dynamically invalid.

Keywords: overlapping generations models; monetary equilibria; cycles; minimum consumption requirements (search for similar items in EconPapers)
JEL-codes: E31 E42 E63 (search for similar items in EconPapers)
Pages: 19
Date: 2007-09-19
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
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