Modelling an Interest Free Economy Through Overlapping Generation Model (OLG)

Document Type : Original Article

Authors

1 PhD Candidate in Islamic Economics, Faculty of Economics, Allameh Tabataba’i University

2 Assistant Professor in Economics, Faculty of Economics, Allameh Tabataba’i University

Abstract

Interest in conventional economic models is a key and regulator factor. However, there are many debates on the rejection or confirmation of monetary interest rate based on its origins. Some of these origins are objective, such as the productivity of capital and the population, and some like the time preference, the liquidity preference, and the convergence of the utility function, are subjective. This study, in considering the critical views of monetary interest rate, offers a model that, while eliminating interest rate, seeks to exploit the benefits of interest economies, such as consumption, savings and accumulation of capital. The intergenerational exchange is shaped in the framework of the overlapping generation model and the population is a positive factor that grows as production grows.  In this model, money is issued only once by government and it is concluded that the continuation of the economy will increase the real value of fixed currency units. The liquidity preference will be eliminated in this model, and as a result there will not be Hording money, and the allocations will be optimal, and this optimality will be permanent.

Keywords


- Allais, M. (1947). Economie ET Interet. Paris, Imprimerie Nationale, First Edition
- Bakhshi, R.(2005). Examiniation of The Effects and Origens of Interest Rate with emphasis on the Biologycal Interest Rate of Samuelson in the Fram Work of OLG. PhD Thesis of Isfahan University (In Persian).
- Bakhshi, R.(2011). Comparative Study of Zero Interest Rate Theory and Prohibition of Usury in Islam. Eghtesad-e-Islami, 38, 10,61-88 (In Persian).
- Baumol, W. (1952). The Transactions Demand for Cash. Quarterly Journal of Economics, 65, 545-556.
- Blanchard O. & Fischer, A(1986). Lectures on macroeconomics, Translated by khataee and Mohammadi. 1998. Publishing Planning and Budget Organization.
- Bohm-Bawerk, E.V. (1889). Capital and Interest. South Holland, Libertarian Press, translated by William Smart.
- Bohm-Bawerk, E.V. (1891). Positive theory of Capital. translated by William Smart.
- Calvo, A. G.(1998). Capital Flows and Capital- Market Crises, Journal of Applied Economics, 1(1), 35-54.
- Carlson, J. B. (1988). Rules Versus Discretion: Making a Monetary Rule Operational. Federal Reserve Bank of Cleveland.
- Diamond, P. (1965). National Debt in a Neoclassical Growth Model. American economic Review, 55, 1126-1150.
- Fisher, I. (1930). The theory of interest. NY, Macmillan
- Friedman, M. (1948). A Monetary and Fiscal Framework for Economic Stability. American Economic Review, 38, 245-64. Reprinted in Essays in Positive Economics, edited by Milton Friedman. (1953) 133-56. Chicago, University of Chicago Press.
- Friedman, M. (1951) .Commodity Reserve Currency. Journal of Political Economy, 59, 203-232. Reprinted in Essays in Positive Economics, edited by Milton Friedman,. 204-50. Chicago, University of Chicago Press, 1953.
- Friedman, M. (1969). The Optimum Quantity of Money and Other Essays. Chicago: 26 University of Chicago Press.
- Gesell, S.(1958). A Natural Economic Order Through Free Land and Free Money. Translated by Bizayi, 2005, Samt publication.
- Hahn, F. and R. Solow (1997). A Critical Essay on Modern Macroeconomic Theory. Blackwell, 13- 22.
- Harrod, R. F. (1948). Towards a Dynamic Economics, Some recent developments of economic theory and their application to policy. London, Macmillan.
- Keynes, J.M. (1936). The General Theory of Employment, Interest and Money, London, Macmillan.
- Lerner. A. P. (1959). Consumption- Loan Interest and Money. Journal of political economy, 67(5), 512-518.
- McKinnon, R. I. (1973). Money and Capital in Economic Development. Washington, DC, Brookings Institution.
- Mises, L. V. (1949). Human Action: A treatise on economics; 1963 edition, New Haven: Yale University Press.
- Mojahedi, M.(2011). Developing An Overlapping General Model of Fractional Reserve Banking Activity with Emphesis on Maurice Allais’s Approach. PhD Thesis,  Isfahan University (In Persian).
- Ono, Y. (1994). Money, Interest and Stagnation-Dynamic Theory and Keynes‘s Economics. London: Oxford University Press.
- Pavizi, D. & Hadian, M. (2012). Interest rate and financial crises.Quarterly Journal ofEconomics and Modelling, 5&6(2), 39-68 (In Persian).
- Phelps, E. S. (1961). The Golden Rule of Capital Accumulation. American Economic Review. 51, 638–43
- Pigoue, A. C. (1920). The Economics of Welfare. (4th) edition, London (1952): Macmillan Ramsey, F. P. (1928). A Mathematical Theory of Saving Economic Journal, 38, 543-59.
- Samuelson, P. (1958). An Exact Consumption Loan Model of Interest with or without Social Contrivance of Money, The Journal of Political Economy, 66(6), 467-482.
- Samuelson, P. (1968). what classical and neoclassical monetary theory really was, Canadian Economics Association, 1(1), 1-15.
- Sanches, D. (2012). The Optimum Quantity of Money. Federal Reserve Bank of Philadelphia, 4, 8-15.
- Simons, H. C. (1936). Rules versus Authorities in Monetary Policy. Journal of Political Economy, 64, 1-30. Reprinted in Economic Policy for a Free Society, edited by Henry Simons, 160-83. Chicago, University of Chicago Press, 1948.
- Simons, H. C. (1946). Debt Policy and Banking Policy. Review of Economic Statistics, 2, 85-89. Reprinted in Economic Policy for a Free Society, edited by Henry Simons, 231-39. Chicago, University of Chicago Press, 1948.
- Swan, T. W. (1956). Economic growth and capital accumulation. Economic Record, 32 (2), 334–361.
- Tobin, J. (1956). The Interest Elasticity of the Transactions Demand for Cash. Review of Economics and Statistics, 38, 241-247
- Woodford, M. (2010). Optimal Monetary Stabilization Policy. Prepared for the new (2010) volumes of the Handbook of Monetary Economics, edited by Benjamin M. Friedman and Michael Woodford.