A Model of Saving and Demand for Money: II


Computing Center, Russian Academy of Science

The work continues [1]. The demand for money and saving supply functions obtained in [1] are used in a closed general equilibrium model with a nontrivial interest payments on cash. It is shown that interest of r per cent per annum paid on cash will give rise to an increase of r per cent per annum in the inflation rate. The dynamic equilibrium in an economy with heterogeneous households is studied. The equilibrium turns out to differ significantly from the one in a homogeneous economy. Since the more patient agents save more and their wealth grows faster, the distribution of wealth shifts in their favor with time. Hence, the interest rate in such an economy decreases with time converging to the smallest available time preference rate.

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