Naive Agents with Non-unitary Discounting Rate in a Monetary Economy

Koichi Futagami and Daiki Maeda ()
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Daiki Maeda: School of Global Studies, Chukyo University

No 21-28, Discussion Papers in Economics and Business from Osaka University, Graduate School of Economics

Abstract: We incorporate naive agents with a non-unitary discounting rate into a cash- in-advance (CIA) model. Through this extension, we obtain the following results. First, we show that there exists an equilibrium in which the CIA constraint does not bind when individuals discount their utilities from future consumption lower than their utilities from future leisure time. It is important to note that this non- binding equilibrium exists even if the nominal interest rate takes a positive value. Second, we demonstrate that increases in the money supply growth rate decreases the individuals f saving rate in the equilibrium in which the CIA constraint does not bind. Third, we exhibit that when the equilibrium where the CIA constraint does not bind exists, the welfare level of this equilibrium can be higher than that of the equilibrium in which the CIA constraint binds. Moreover, we deduce that the Friedman rule cannot be optimal in the equilibrium in which the CIA constraint binds and present the result that the optimal level of the optimal nominal interest rate is affected by the difference of the discount rates.

Keywords: Non-unitary discounting rate; Naive agents; CIA constraint; Monetary policy; Friedman rule (search for similar items in EconPapers)
JEL-codes: E52 E70 (search for similar items in EconPapers)
Pages: 33pages
Date: 2022-03
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:osk:wpaper:2128

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