The payoff of the bonds is stochastic

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Consider an intertemporal model in which representative households choose consumption, c (subscript t), money holdings, m(subscript t+1), and bond holdings, b (subscript t+1), to maximize their utility over time, prices are perfectly flexible, and all markets are in equilibrium. Write out the households’ optimization problem with no uncertainty, the Lagrangian, and the first order conditions. Show that in this circumstance households choose not to hold money as long as the riskless payoff of the bonds, r (subscript t), is positive for all t. If it was an optimization problem under uncertainty, i.e., the payoff of the bonds is stochastic, would the conclusion in (a) still hold? Briefly explain.

Reference no: EM13887846

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