The Overlapping - Generations Model . II . The Case of Pure Exchange with Money

Government debt instruments (e.g., money and government bonds) serve many functions in the private sector. They can be stores of value, vehicles for the payment of taxes, media for transactions, and so forth. Their roles vary from economy to economy depending upon institutions and conventions. One of the roles, however, is basic to all others: if a government debt instrument does not serve as a value store, then it cannot serve any other useful function. In the present article, the paper assets created by the government are assumed to have two functions: (1) they are, of course, potential stores of value; and (2) they are used by households in paying their taxes and by the government in making transfers. In addition, we make the extreme assumptions that markets are complete and transactions are costless. There is then no essential economic difference between the various forms of government debt; hence, we shall refer to all forms of “government paper” as simply “money.” Money does not in general serve as a proper store of value-i.e., money cannot have a positive price-in the finite-horizon economy in which the