The Value of Money in an Overlapping Generations Model: A Note

Abstract

In this paper a simple overlapping generations model – with N perishable commodities, no intrinsic uncertainty, one agent per generation with an intertemporally separable utility function, and one asset; money – is constructed. To this basic model, two extrinsic states of nature (h {1, 2}) are added, at date 2. Sufficient conditions are found to ensure a continuum of rational expectations equilibria exist with the property that money is worthless if h = 1. The result is then extended to money becoming worthless with positive probability, for a finite number of dates.

Keywords: Overlapping generations model, Utility function, Money

JEL Classification: C62, D51, E41