Existence and optimality of currency equilibrium in stochastic overlapping generations models: The pure endowment case

Abstract

We consider a pure exchange stochastic overlapping generations economy. Sufficient conditions for the existence of a monetary equilibrium and a characterization of optimality are provided. It is shown that in a monetary equilibrium currency provides partial insurance, and that the equilibrium allocation is optimal. It is also shown that if an allocation is optimal, the contingent claim prices associated with it are such that—in an average sense—the present value of the social endowment is bounded.