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On the Efficiency of Monetary Equilibrium when Agents are Wary

Aloisio Araujo, Juan Pablo Gama-Torres, Rodrigo Novinski and Mario Pascoa
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Juan Pablo Gama-Torres: IMPA
Rodrigo Novinski: Faculdades Ibmec

No 416, School of Economics Discussion Papers from School of Economics, University of Surrey

Abstract: Wary agents tend to neglect gains at distant dates but not the losses that occur at those far away dates. For these agents, Ponzi schemes are not the only improving schemes compatible with non-arbitrage pricing. However, ecient allocations can be sequentially implemented by allocating money and then, at subsequent dates, taxing savings plans whose open end bene ts to wary agents outweigh the cost of carrying on cash. The allocative role of money does not disappear over time and the transversality condition allows for consumers to have limiting long positions. Money supply does not have to go to zero and, actually, there are equilibria where it does not. We address also why at money does not lose its value when Lucas trees are available.

Pages: 51 pages
Date: 2016-03
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mon and nep-sog
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