By Jean-Pascal Benassy

A massive fresh development in macroeconomics is the improvement of dynamic stochastic common equilibrium (DSGE) macromodels. using DSGE versions to review financial coverage, although, has resulted in paradoxical and confusing effects on a couple of crucial financial concerns together with cost determinacy and liquidity results. In funds, curiosity, and coverage, Jean-Pascal Bénassy argues that relocating from the traditional DSGE models—which he calls "Ricardian" simply because they've got the well-known "Ricardian equivalence" property—to one other, "non-Ricardian" version might unravel a lot of those concerns. A Ricardian version represents a family as a homogeneous kinfolk of infinitely lived members, and Bénassy demonstrates unmarried modification—the assumption that new brokers are born over the years (which makes the version non-Ricardian)—can bridge the present hole among financial intuitions and proof, on one hand, and rigorous modeling, at the different. After evaluating Ricardian and non-Ricardian versions, Bénassy introduces a version that synthesizes the 2 methods, incorporating either countless lives and births of recent brokers. He applies this version to a few concerns in financial coverage, particularly liquidity results, rate of interest ideas and value determinacy, international determinacy, the Taylor precept, and the financial thought of the cost point. eventually, utilizing an easy overlapping generations version, he analyzes optimum financial and financial regulations, with a distinct emphasis on optimum rate of interest principles.

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These households all have the same utility function (1); they receive each the same income yt and transfers tt , which are simply aggregate income and transfers divided by N: yt ¼ Yt ; N tt ¼ Tt N ð46Þ However, assume that, because of di¤erent histories, each household i, i A ½1; NŠ, has a di¤erent amount of financial assets, denoted as oit . Let us denote by cit the consumption of agent i in period t. By the same method as the one that led to equation (40), we find that the intertemporal budget constraint of agent i is y X Ds Ps cis ¼ Dt oit þ s¼t y X Dsþ1 Ps ys À s¼t y X Dsþ1 Ps ts ð47Þ s¼t Next we divide the government’s intertemporal budget constraint by N: y X Dsþ1 Ps ts ¼ s¼t y Dt W t X À ðDs À Dsþ1 ÞPs ys N s¼t ð48Þ We combine these two relations to obtain y X s¼t Ds Ps cis ¼ Dt oit À y Dt W t X þ Ds Ps ys N s¼t ð49Þ We find that individual holdings of financial assets oit do have private value to those holding the assets, but they have also a negative value for other agents via the second term of the right-hand side.

We also saw that a major di¤erence between the two models was the presence of a Pigou e¤ect in the OLG model and its absence in the Ricardian model. However, a problem with this comparison is a discontinuity between the two models, in that there is no formulation that includes both cases. That is why in the next chapter we will describe a model due to Weil (1987, 1991) that is a non-Ricardian model with properties similar to the OLG model but that includes the Ricardian model above as a particular case.

1 So we describe in the next section a simple version of this model that we will use in chapters 3 through 6. We focus in this chapter on how a Pigou e¤ect is generated in such a model and derive some useful dynamic equations. 1. The original Weil model is in continuous time and includes money in the utility function (MIUF), whereas the model of this chapter is in discrete time and uses a cash in advance constraint. Nevertheless, these di¤erences are not so important. Appendix A develops a MIUF version of this model in order to show that the fundamental dynamic equation is essentially the same for the two versions.

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