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. Monetary policy can set, alternatively, the nominal rate of interest or the...

Debt is sustainable at a competitive equilibrium due solely to the reputation of debtors for repayment; that is, even absent collateral or legal sanctions available to creditors. In the presence of uninsurable risks, or in an asset market that is incomplete, when the rate of interest falls...