Chapter 25 Credit and Currency . Credit and currency with long-lived agents This chapter describes Townsend’s (1980) turnpike model of money and puts it to work. The model uses a particular pattern of heterogeneity of endowments and locations to create a demand for currency. | Chapter 25 Credit and Currency . Credit and currency with long-lived agents This chapter describes Townsend s 1980 turnpike model of money and puts it to work. The model uses a particular pattern of heterogeneity of endowments and locations to create a demand for currency. The model is more primitive than the shopping time model of chapter 24. As with the overlapping generations model the turnpike model starts from a setting in which diverse intertemporal endowment patterns across agents prompt borrowing and lending. If something prevents loan markets from operating it is possible that an unbacked currency can play a role in helping agents smooth their consumption over time. Following Townsend we shall eventually appeal to locational heterogeneity as the force that causes loan markets to fail in this way. The turnpike model can be viewed as a simplified version of the stochastic model proposed by Truman Bewley 1980 . We use the model to study a number of interrelated issues and theories including 1 a permanent income theory of consumption 2 a Ricardian doctrine that government borrowing and taxes have equivalent economic effects 3 some restrictions on the operation of private loan markets needed in order that unbacked currency be valued 4 a theory of inflationary finance 5 a theory of the optimal inflation rate and the optimal behavior of the currency stock over time 6 a legal restrictions theory of inflationary finance and 7 a theory of exchange rate 1 Some of the analysis in this chapter follows Manuelli and Sargent 1992 . Also see Chatterjee and Corbae 1996 and Ireland 1994 for analyses of policies within a turnpike environment. - 897 - 898 Credit and Currency . Preferences and endowments There is one consumption good. It cannot be produced or stored. The total amount of goods available each period is constant at N. There are 2N households divided into equal numbers N of two types according to their endowment sequences. The two types of .
