An Axiomatic Analysis of the Optimal Rate of Interest in the Bewley Models

The main question of this study is that in an environment that we have only precautionary demand for money and assets, which rate of interest assures existence and optimality of equilibrium. This economic environment has two essential properties: heterogeneous agents that face to idiosyncratic risk, and incomplete markets without possibility of complete insurance by means of lending for hedging this risks. In this environment, agents hold precautionary savings in the form of a single asset such as fiat currency, credit, and capital for self-insurancing themselves against idiosyncratic income fluctuations. Bewley models are formed in this environment. In this paper, by using the axiomatic method, we will prove that when agents have access to the two forms of assets for self insurancing, i.e. fiat currency and credit, the necessity of decreasing the interest rate (more than time preference rate) for convergence of consumption and asset and the existence of monetary equilibrium are still true.