The emergence of equilibrium cycles in a monetary economy with a separable utility function

Abstract

This paper analyzes the dynamic properties of the monetary economy when money held during the period induces some utility. It is shown that the price level and real money balances may have chaotic dynamic paths even if the utility function is separable in real money balances and consumption. A crucial point is that a constraint on the utility of money yields the wealth effect that inflation will reduce the real value of assets. Hence, as in the overlapping generations model, the conflict between substitution and wealth effects may cause globally stable periodic orbits as well as the complicated dynamics.