Optimal steady-state in stationary consumption-loan type models

Abstract

We consider a stationary overlapping generations economy, and prove that an optimal steady state exists. We show that if a government intervention is needed in order to implement the optimal steady state as a competitive equilibrium, it is necessary only in a finite number of periods. If the interest rate associated with the optimal steady state equals the population rate of growth, some outside money may be required in order to make the competitive equilibrium follow the optimal steady state. We show that our existence result enables us to construct Pareto optimal competitive equilibria in some important cases.