Working Paper: NBER ID: w0989
Authors: Bennett T. McCallum
Abstract: The main arguments of this paper can be summarized as follows. (1) The overlapping-generations (OG) structure provides a useful framework for the analysis of macroeconomic issues involving intertemporal allocation. (2) As a "model of money," the basic OG setup -- which excludes cash-in-advance or money-in-the-utility-function (MIUF) features -- is inadequate and misleading because it neglects the medium-of-exchange property that is the distinguishing characteristic of money. (3) That this neglect obtains is verified by noting that, in contrast with an axiomatic "traditional presumption," the same aggregate leisure/consumption bundles are available in equilibria in which "money" is valued and valueless. (4) That the model may be misleading is demonstrated by examples in which three of its most striking properties --tenuousness of monetary equilibrium, optimality of zero money growth, and price level invariance to open-market exchanges -- disappear in the presence of modifications designed to reflect the medium-of-exchange property. (5) There is no compelling reason why cash-in-advance, MIUF, or other appendages should not be used in conjunction with the OG framework.
Keywords: overlapping generations; monetary economics; monetary equilibrium
JEL Codes: E40; E51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| og structure (L10) | macroeconomic issues involving intertemporal allocation (D15) |
| neglect of medium-of-exchange property (E42) | inadequacy of basic og setup (L15) |
| modifications to reflect medium-of-exchange function (E42) | vanishing of significant properties of the model (C52) |
| absence of medium of exchange (E42) | suboptimal outcomes (I14) |
| monetary equilibrium efficient under certain conditions (D53) | optimality of money growth (O42) |
| nonmonetary equilibria (D59) | inefficient outcomes (D61) |