Debt, liquidity and dynamics

Money, which provides liquidity, is distinct from debt. The introduction of a bank that issues money in exchange for debt and pays out its profit as dividend to shareholders modifies the model of overlapping generations. The set of equilibrium paths, their dynamic properties, as well as the scope and effectiveness of monetary policy are significantly altered: though low rates of interest are associated with superior steady state allocations, stability of the steady state may require a nominal rate of interest above a certain minimum: without production, a decrease in the nominal rate of interest may result in explosive behavior or convergence to an endogenous cycle, while in an economy with production, an increase in the nominal rate of interest may lead to indeterminacy and fluctuations.