Intertemporal macroeconomic equilibrium

Abstract

Macroeconomic models with imperfect competition have been investigated intensively over the past two decades. Most of these models abstract from aggregation issues and consider representative agent economies with three types of goods: labor, a consumption good, and fiat money. In contrast to some models which incorporate money by including end-of-period balances as an argument in the utility function, this chapter follows the temporary monetary equilibrium approach, as introduced by Hicks (1946) and Patinkin (1956) and developed in full rigor by Grandmont (1983). In this framework, a store of value motive of money is derived from an explicit modeling of intertemporal decision making and of future price expectations.

“This self-referential aspect of economic systems gives rise to enormous theoretical problems of indeterminacy (i.e. multiple equilibria) when people’s expectations are left as ‘free variables’ that are not restricted by economic theory. To fight that threat of indeterminacy, economists have embraced the hypothesis of rational expectations.”

A. Marcet and T.J. Sargent (1992)