Resurrecting Equilibria through Cycles

University of Aarhus Economics Working Paper No. 2007-12

21 Pages Posted: 10 Jun 2008

See all articles by Richard C. Barnett

Richard C. Barnett

Drexel University - Department of Economics & International Business

Joydeep Bhattacharya

Iowa State University - Department of Economics

Helle Bunzel

Iowa State University - Department of Economics

Date Written: July 26, 2007

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

JEL Classification: E31, E42, E63

Suggested Citation

Barnett, Richard C. and Bhattacharya, Joydeep and Bunzel, Helle, Resurrecting Equilibria through Cycles (July 26, 2007). University of Aarhus Economics Working Paper No. 2007-12, Available at SSRN: https://ssrn.com/abstract=1141786 or http://dx.doi.org/10.2139/ssrn.1141786

Richard C. Barnett (Contact Author)

Drexel University - Department of Economics & International Business ( email )

3141 Chestnut St.
Philadelphia, PA 19104
United States

Joydeep Bhattacharya

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States
515-294-5886 (Phone)
515-294-0221 (Fax)

Helle Bunzel

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States

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