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2001

Cowles Foundation Discussion Papers

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Inflationary Bias In A Simple Stochastic Economy, Ioannis Karatzas, Martin Shubik, William D. Sudderth, John Geanakoplos Oct 2001

Inflationary Bias In A Simple Stochastic Economy, Ioannis Karatzas, Martin Shubik, William D. Sudderth, John Geanakoplos

Cowles Foundation Discussion Papers

We construct explicit equilibria for strategic market games used to model an economy with fiat money, one nondurable commodity, countably many time- periods, and a continuum of agents. The total production of the commodity is a random variable that fluctuates from period to period. In each period, the agents receive equal endowments of the commodity, and sell them for cash in a market; their spending determines, endogenously, the price of the commodity. All agents have a common utility function, and seek to maximize their expected total discounted utility from consumption. Suppose an outside bank sets an interest rate rho for …