Myopia and Monetary Equilibria

S. LOVO, H. Polemarchakis

Journal of Mathematical Economics

September 2010, vol. 46, n°5, pp.925-936

Departments: Finance, GREGHEC (CNRS)

accepté le 08/08/2010Abstract: In an infinitely lived, representative individual economy, important properties of competitive equilibria, such as determinacy and the non-existence of monetary equilibria, are not robust to the introduction of myopia. An individual is myopic if, at each date, he plans consumption only for that date and few periods that immediately follow; that is, his planning horizon, n, is finite. Equilibria with myopia can display real indeterminacy and allow for monetary as well as non-monetary steady states; thus, they share some of the features of equilibria in economies of overlapping generation. The equilibrium price dynamics (but not the consumption dynamics) of an exchange economy with extreme myopia, n =1, are identical to the dynamics of an overlapping generation economy with two-period lives. Keywords: Infinitely lives individuals; Myopia; Overlapping generations