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The Permanent Income–Life Cycle Hypothesis in a Monetary Economy and the Neutrality of Money: A Continuous‐Time Analysis

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  • Hiroaki Hayakawa

Abstract

This paper addresses the viability of the permanent income– life cycle hypothesis in a monetary economy in which money enters the utility function of infinitely lived agents. Two forms of the hypothesis are distinguished: weak and strong. Deriving the Keynes–Ramsey rule of consumption under preferences of the Uzawa–Epstein recursive class and examining the optimal consumption–wealth relation, the paper studies the restrictions that these forms impose on the utility functional, identifies the necessary and sufficient conditions for the hypothesis to hold, and clarifies how such conditions are related to the neutrality of money. JEL Classification Numbers: D91, E21, E40, C61.

Suggested Citation

  • Hiroaki Hayakawa, 2001. "The Permanent Income–Life Cycle Hypothesis in a Monetary Economy and the Neutrality of Money: A Continuous‐Time Analysis," The Japanese Economic Review, Japanese Economic Association, vol. 52(1), pages 77-92, March.
    • Handle: RePEc:bla:jecrev:v:52:y:2001:i:1:p:77-92
    DOI: 10.1111/1468-5876.00182
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    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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