Overlapping-generations Research Articles

Microeconomic Foundation for Phillips Curve with a Three-Period Overlapping Generations Model and Negative Real Balance Effect

Abstract We show a negative relation between the inflation rate and the unemployment rate, that is, the Phillips curve using a three-period overlapping generations (OLG) model with childhood period and pay-as-you-go pension for older generation under monopolistic competition with negative real balance effect. In a three-period OLG model, there may exist a negative real balance effect because consumers have debts and savings. A fall (or rise) in the nominal wage rate induces a fall (or rise) in the price, then by negative real balance effect, the unemployment rate rises (or falls), and we get a negative relation between the inflation rate and the unemployment rate. This conclusion is based on the premise of utility maximisation of consumers and profit maximisation of firms. Therefore, we present a microeconomic foundation for the Phillips curve. We also examine the effects of fiscal policy financed by seigniorage, which is represented by left-ward shift of the Phillips curve.

Pensions, Income Taxes and Homeownership: A Cross-Country Analysis

This paper studies the role of pensions and income taxes in determining homeownership and household wealth. It provides a cross-country analysis, using tax and pension policy designs in Germany, the US and Australia. These developed nations have similar incomes per capita but very different homeownership rates, with the US and Australia having much higher homeownership compared to Germany. The question is to what extent the observed differences in homeownership are induced by national tax and transfer policies. To that end, we develop a stochastic, overlapping generations (OLG) model with tenure choice. The model is calibrated to Germany featuring German statutory public pension and dual income tax systems, and then applied to study the effects of alternative income tax and pension policy structures. Our simulation results indicate that the US and Australian policy designs have a dramatic impact on homeownership, explaining more than half of the observed differentials. We also show significant macroeconomic effects due to differences in tax and pension policies.

Involuntary Unemployment Under Ongoing Nominal Wage Rate Decline in Overlapping Generations Model

We analyze involuntary unemployment based on consumers’ utility maximization and firms’ profit maximization behavior with ongoing nominal wage rate decline. We consider a three-periods overlapping generations (OLG) model with a childhood period as well as younger and older periods under monopolistic competition with increasing, decreasing or constant returns to scale technology. We examine the existenbce of involuntary unemployment in that model with ongoing mominal wage rate decline (or deflation). Even if the nominal wage rate declines, we have a steady state with involuntary unemployment and constant output and employment. We need budget deficit or budget surplus to maintain the steady state depending on whether real balance effect is positive or negative. Also we examine the possibility to achieve full-employment by fiscal policy

Very simple mathematical model of MMT (Modern Monetary Theory)

In recent years, a school of economics called MMT (Modern Monetary Theory) has been attracting attention, but it has not been analyzed theoretically or mathematically. This study aims to provide a simple theoretical basis for the skeleton of the MMT argument, while maintaining the basics of the neoclassical microeconomic framework, such as utility maximization of consumers by means of utility function and budget constraint, and equilibrium of supply and demand of goods, under perfect competiton with constant returns to scale technology. Using a simple overlapping generations (OLG) model that includes economic growth due to technological progress, we will argue that: 1) a continuous budget deficit is necessary to maintain full employment when the economy is growing, and that this deficit does not have to be covered by future surpluses; 2) Inflation is caused when the actual budget deficit exceeds the level necessary and sufficient to maintain full employment. In order to avoid further inflation, it is necessary to maintain a certain level of budget deficit; 3) A shortfall in the budget deficit leads to recession and involuntary unemployment. To recover from this, a budget deficit that exceeds the level necessary to maintain full employment is required. However, since a continuous budget deficit is necessary after full employment is restored, the deficit created to overcome the recession does not need to be covered by future budget surpluses, nor should it be.

Rederivation of Gertler’s model and analysis of the Korean economy

This paper makes a theoretical contribution by providing clear and detailed derivation of economic agents’ decision problems including elastic labor supply in Gertler’s overlapping generation (OLG) model. We apply the model to the Korean economy by calibration based on Korean economic data. It also analyzes the impact of current social issues such as aging and extension of retirement age, on the Korean economy in a long-run equilibrium. Subsequently, we also discuss the implications of the analysis. Aging has prolonged the period of retirement; therefore, population structure changes by the increase in the proportion of retirees, the total consumption-to- GDP ratio decreases, and capital stock increases due to reduced propensity to consume out of wealth in preparation for an individual’s retirement life. The implementation of retirement age extension increases the proportion of retirees relatively less and alleviates fluctuations in labor supply and the share of financial assets for both economic agents. However, the decrements in consumption-to-GDP ratio is larger than before, and this leads to a larger rise in the capital stock compared to when there is only an aging effect.

International capital flows in club of convergence

PurposeThe paper analyzes the pattern of international capital flows, accounting for the convergence on economic growth.Design/methodology/approachThe paper employs an empirical analysis combined with a theoretical model. The evidence is based on a cross-section regression over a sample of 172 economies. And the model is an open multi-country overlapping generation (OLG) economy.FindingsThe empirical evidence records that the pattern of international capital flows in the club of convergence can diverge from the pattern in the club of unconvergence. A higher productivity growth rate is associated with more net capital inflows in the club of convergence but less net capital inflows in the club of unconvergence. The theory shows that proximity to world technology frontier can explain the divergence of capital flows.Research limitations/implicationsThe result can account for controversies between theories on the cross-border capital flows: allocation puzzle, up-hill capital flows and neoclassical growth model.Originality/valueThe paper combines both the empirical analysis with the theoretical model construction to account for the role of convergence of economic growth on determining the pattern of international capital flows.

ECONOMIC IMPACTS OF POLICY ADOPTED BY CHINA FOR ITS AGING POPULATION

With China’s rapidly aging population, this paper constructs a policy model using overlapping generation (OLG) model and the computable general equilibrium (CGE) modeling to analyze the second-child policy and delaying retirement policy. Our research findings suggest that considering the short-term effects, delaying the retirement age imposes a greater impact on the economy than the second-child policy. Its economic impact increases initially, but then decreases to a stable level showing a diminishing influence. In the long term, the second-child policy has greater ability to boost the economy than the delaying retirement age policy and its economic impact gets stronger. From an industrial output perspective, the two policies exert greater influence on agriculture, light industry, finance and service sector than on construction and heavy industries. From an industrial import and export perspective, the two policies have great influence on finance, electric power, and fossil energy more than they do on the agricultural sector. From a monetary perspective, the impacts are greater on household income followed by the government income and corporate income, respectively. The policies also make a bigger difference to fixed capital than to changes in deposits and loans.

Involuntary Unemployment in a Neoclassical Model

Abstract We show the existence of involuntary unemployment without assuming wage rigidity using a neoclassical model of consumption and production. We consider a case of indivisible labor supply and increasing returns to scale under monopolistic competition. We derive involuntary unemployment by considering utility maximization of consumers and profit maximization of firms in an overlapping generations (OLG) model with two or three generations. In a two-periods OLG model it is possible that a reduction of the nominal wage rate reduces unemployment. However, if we consider a three-periods OLG model including a childhood period, a reduction of the nominal wage rate does not necessarily reduce unemployment.

Population aging, social security and fiscal limits

We use an overlapping generations (OLG) life-cycle model with distortionary taxation on labor and capital to derive a threshold dependency ratio, i.e. a point in the cross-section distribution of the population beyond which tax revenues can no longer sustain the planned level of transfers to retirees. We quantify the level of the threshold; the distance of the economy from the threshold; and the probability of reaching the threshold at some point in the future. The model is calibrated on the United States and fourteen European countries which have dependency ratios among the highest in the world. We examine the effects on the threshold and welfare of a number of policies often advocated to improve the sustainability of pension systems. New tax data on dynamic Laffer effects are provided.

Taxes on unhealthy food and externalities in the parental choice of children's diet.

This study examines whether taxes on unhealthy food are suitable for internalizing intergenerational externalities inflicted by parents when they decide on their children's diet. In an overlapping generations (OLG) model with an imperfectly altruistic parent, the optimal steady-state tax rate on unhealthy food is strictly positive. However, it is only second-best because, in addition to reducing unhealthy consumption by the child, it distorts the parent's unhealthy consumption. Surprisingly, the optimal tax may underinternalize or overinternalize the marginal damage.

The South's demographic transition and international capital flows in a financially integrated world economy

AbstractIn the coming decades, the countries of the South will be facing the aging of the population faster than the countries of the North. This will have long-term economic consequences for the South but also for the North through the changing of international capital flows. To study the latter, we build a simple two-region two-period overlapping generations (OLG) model, assuming fully integrated financial markets. This allows us to determine the analytical expression of the world interest rate dynamics at general equilibrium and the resulting capital flows accruing to each of the two regions (the North and the South). From there, we analyze how a reduction in either fertility or mortality alters the magnitude of the international capital flows. Contradictory effects are evidenced. To clear-up any ambiguity and to study the South's demographic transition, which involves a succession of shocks, we propose numerical simulations. Even if the results stress that the institutional context and technological catching-up may matter, they suggest in a rather general way that the declines in both fertility and mortality tend to reduce the relative capital needs of the Southern economies and consequently their capital inflows. This, in turn, would be beneficial to the North's productive capacity, which should then hold more capital.

Evolutionary Pattern and Intergenerational Transmission of Inequality in Human Capital

This study investigates whether the inequality in human capital persists among generations in the framework of overlapping generation (OLG) model. Including different expectations for return on education investment into to OLG model and assuming that an individual’s human capital is totally determined by education investment, we obtain the evolutionary pattern of inequality in education investment among successive generations and conducted numerical simulation. We find that when the rate of diminishing marginal return on education investment is low, the inequality in human capital persists in the long run and the human capital is polarized in equilibrium state. When the rate of diminishing marginal return on education investment is high, there exists convergence in human capital distribution and the inequality in human capital will disappear in the long run.

The Dynamics of Cultural Traits in Inherited Endogenous Social Networks

We study the dynamics of continuous cultural traits (as a specific type of continuous opinions) in an OLG (overlapping generation) structure and in an endogenous social network, where the network changes are inherited. Children learn their cultural trait from their parents and their social environment modelled by network. Parents want their children to adopt a cultural trait that is similar to their own and engage in the socialization process of their children by forming new links or deleting connections. Changing links from the inherited network is costly, but having many links is beneficial. We propose three ways to endogenize the process of network formation. In the first one, the network is supposed to be directed and each dynasty can either form or delete a directed link unilaterally with another dynasty. Therefore, at each period, each family faces a utility opitimization problem where a trade-off between own utility losses and the improvements of child's cultural trait. We have shown that if the cost of network changes is greater than the cost of child care, extremists will never add links, and in the case of sufficiently low cost, extremists may cut all ties with the society. In the second and third models, the network is supposed to be undirected. In the second model, we assume that after each period, a pairwise stable network (PS network for short) is reached. In this case, there always exist sufficiently small cost parameters such that the empty network is the unique PS network. In the third model, we assume that after each period, a pairwise stable network with transfers (PST network for short) is reached. We have shown the existence of the PST network for each period, however, it is not necessary to be unique. Moreover, a necessary and sufficient condition is given such that a network is PST for given V(t) and G(t). The convergence of cultural traits in this case is guaranteed. Regarding the efficiency of the network, we show that there always exist sufficiently small cost parameters such that the empty network is the unique efficient network, and sufficiently large costs of child care such that the complete network is the unique efficient network. Moreover, more detailed dynamics of cultural traits are studied when the costs of network changes and benefits from integration are low, intermediate, and large, respectively.

Long-term Outlook for the German Statutory Pension System

This paper presents long term projections of the German pension system that are based on a general equilibrium model with overlapping generations (OLG). This framework takes into account the two way feedback of both micro and macroeconomic relationships, meaning that households, for example, react to changes in the statutory pension system, such as the retirement age or the replacement rate. Changes in households' behaviour, in turn, impact on macroeconomic developments and public finances. One approach to parametrically reform the pension system would be linking (indexing) the retirement age systematically to increasing life expectancy. The model shows that the resulting increase in employment would also bolster social security contributions and taxes. Moreover, with a rising retirement age and the associated longer periods of work, pension entitlements would increase.

Involuntary Unemployment and Fiscal Policy for Full-Employment

In this paper we show the existence of involuntary unemployment based on consumers’ utility maximization and firms’ profit maximization behavior under perfect competition with decreasing or constant returns to scale technology using a three-period overlapping generations (OLG) model with a childhood period as well as younger and older periods, and analyze the effects of fiscal policy financed by tax and budget deficit (or seigniorage) to realize full-employment under a situation with involuntary unemployment. We show the following results. 1) In order to maintain the steady state where employment increases at some positive rate, we need a budget deficit (Proposition 1). 2) If the full-employment state is realized, we do not need budget deficit to maintain full-employment (Proposition 2).

Demographics and the Natural Real Interest Rate: Historical and Projected Paths for the Euro Area

This paper employs an aggregate representation of an overlapping generation (OLG) model quantifying a decrease of the natural real interest rate in the range of -1.7 and -0.4 percentage points in the euro area between 1990 and 2030 due to demographics alone. Two channels contribute to this downward impact: the increasing scarcity of effective labor input and the increasing willingness to save by individuals due to longer life expectancy. The decrease of the aggregate saving rate as individuals retire has an upward impact which is never strong enough. Mitigating factors are: higher substitutability between labor and capital, higher intertemporal elasticity of substitution in consumption, reforms aiming at increasing the relative productivity of older cohorts, the participation rate and the retirement age. The simulated path of the natural real interest rate is consistent with recent econometric estimates: an upward trend in the 70s and 80s and a prolonged decline afterward.

개방경제에서 인구구조 변화가 경상수지 및 대외자산 축적에 미치는 영향분석 및 정책적 시사점 (The Effects of Demographic Change on Current Account and Foreign Asset Accumulation)

Korean Abstract: 본 연구는 인구구조 변화가 경상수지 및 순대외자산에 미치는 중장기적 영향을 실증분석 및 이론모형을 통해 살펴본다. 인구구조는 경제가 발전함에 따라 ① 고출산율·고사망률 ② 고출산율·저사망률 ③ 저출산율·저사망률 3단계 전환기를 거치며, 진행 과정에서 인구 증가와 고령화가 발생한다. 한국은 기대수명 증가와 출산율의 급격한 감소로 인해 고령화가 세계에서 가장 빠르게 진행되고 있으며, 향후 노년부양률이 급격하게 증가할 것으로 전망된다. 한편 경상수지는 상품 및 서비스의 수출입에 따른 상품수지와 배당금, 이자 등 내국인의 해외투자와 외국인의 국내투자의 차이인 소득수지의 합이며, 그중 상품수지는 국내저축과 투자의 차이로 나타낼 수 있다. 인구구조의 변화는 가계의 소비·저축 의사결정 및 기업의 투자, 자본 축적에 영향을 미친다. 고령화에 따른 노년부양률 증가는 경제의 소비 유인을 증가시키고, 저축을 감소시켜 경상수지 적자 요인으로 작용할 수 있다. 3장 국가패널 분석 및 4장 세대간 중첩(OLG) 모형 분석 결과, 한국은 현재 높은 생산가능인구 비중이 지속적인 경상수지 흑자의 상당 부분을 설명하며, 고령화가 심화됨에 따라 인구구조가 경상수지 감소 요인으로 작용할 것으로 전망된다. UN의 2019년 세계인구전망을 사용하여 인구구조 변화가 경상수지에 미치는 영향을 예측해본 결과, 2030년대 이후 경상수지가 적자로 반전될 것으로 나타났다. 우리나라는 개방경제의 이점을 활용하여 높은 경제성장률을 지속한 끝에 선진국 대열에 진입하였다. 그러나 한국 원화는 국제적 호환성이 제한되어 있고 환율이 외환의 수급에 의하여 결정된다. 경상수지 적자가 지속될 경우 외환시장의 불안정성 및 금융위기의 배경으로 작용할 수 있으므로 이에 대한 대비가 필요하다. 우리나라는 수출 주도의 상품수지 흑자 중심 경상수지 구조를 가지고 있다. 이러한 경상수지 흑자는 미래 소비를 위한 해외 저축을 의미하며, 이는 순대외 자산 축적으로 귀결된다. 순대외자산은 배당, 이자 등의 소득수지로 경상수지흑자에 기여할 수 있다. 한국은 1998년 이후 지속적으로 경상수지 흑자를 유지하였음에도 불구하고 2014년에 순대외자산국에 진입하였다. 급격한 인구구조의 변화를 감안할 때 경상수지 흑자와 순대외자산 축적의 선순환 구조를 구축하는 것이 중요하다. English Abstract: This study investigates the long-term effects of demographic changes on current account and net foreign assets. Along with economic developments, there are three stages of the demographic changes; (1) high birth rate and high mortality rate, (2) high birth rate and low mortality rate, and (3) low birth rate and low mortality rate. Population growth and aging occur in the process. Korea is one of the countries that experienced the fastest demographic changes with increasing life expectancy and decreasing fertility rates in the world. The elderly support rate is also expected to increase rapidly. Meanwhile, the current account balance is the sum of trade balance (net export), and income balance, defined as the income difference between the foreign investment of residents and the domestic investment of foreigners. Trade balance can be interpreted as the difference between domestic saving and investment. Demographic changes can affect consumption and saving decisions of households and investment of firms. For example, aging can increase the incentives for the consumption of the economy and reduce savings, which could potentially lead to current account deficits. According to the results of the empirical analysis of Chapter 3 and overlapping generations (OLG) model of Chapter 4, Korea accounts for a large part of the current account surplus with a current high proportion of the working-age population, and it is expected to become the current account deficit with an aging population. Using the 2019 World Population Prospects of UN to predict the impact of demographic changes on the current account, the current account surplus of Korea will turn into deficit after the 2030s. Korea has become an advanced country by taking advantage of the open economy that helps to sustain high growth. However, the Korean Won has limited international compatibility, and its value is mainly determined by the supply and demand for foreign exchange. Once the current account turns into deficit, it may act as a background for the instability of the foreign exchange market and the financial crisis. The current account surplus of Korea mainly comes from the export- driven trade surplus. The current account surplus can be interpreted as foreign savings for future consumption, which is ultimately accumulated in a net foreign asset position. Net foreign assets can contribute to the current account surplus with income balances such as dividends and interest. Korea has maintained its current account surplus since 1998 but has entered the net foreign assets surplus country in 2014. Given the rapid demographic change, it is important to establish a virtuous cycle of current account surplus and net foreign asset accumulation.

Why Child Allowances Fail to Solve the Pension Problem of Aging Societies

The aim of the paper is to investigate how child allowances affect population growth and pension benefits of pay-as-you-go (PAYG) pension systems in small open and closed economies. We apply an overlapping-generations (OLG) model in its canonical form, where we consider endogenous fertility and growth generated by human capital accumulation. From the analysis, we conclude that in a small open economy, child allowances increase the number of children, yet decrease pension benefits over the long run. If we consider a closed economy, the effect of child allowances on fertility is ambiguous and remains negative on pension benefits over the long run.

Investor experiences and financial market dynamics

How do macrofinancial shocks affect investor behavior and market dynamics? Recent evidence on experience effects suggests a long-lasting influence of personally experienced outcomes on investor beliefs and investment but also significant differences across older and younger generations. We formalize experience-based learning in an overlapping generations (OLG) model, where different cross-cohort experiences generate persistent heterogeneity in beliefs, portfolio choices, and trade. The model allows us to characterize a novel link between investor demographics and the dependence of prices on past dividends while also generating known features of asset prices, such as excess volatility and return predictability. The model produces new implications for the cross-section of asset holdings, trade volume, and investors’ heterogeneous responses to crises, which we show to be in line with the data.

The collapse of Brazilian Social Security: Macroeconomic impacts of the increase of the minimum age of PEC nº 287/2016 reform

This paper presents a simulation of the economic impacts of the increase of the minimum age contained in the Proposal for Constitutional Amendment (PEC) nº 287/2016. For that, an overlapping generations (OLG) model with 57 generations was built, including the transition rule. The results suggest that not increasing the minimum age for retirement is a very bad choice for society. The fiscal situation becomes unsustainable, and the expansion of social security expenditures, in combination with the reduction of the labor supply, leads the country to a scenario of a sharp fall in consumption and output per capita. The simulation with the new minimum retirement age of PEC nº 287/2016 indicates that, although it is not the definitive solution to the Brazilian pension issue. The results of the model indicate that raising the minimum age avoids a very bad scenario, but does not seem to be even able to maintain the current level of output per capita. As a policy suggestion, although PEC nº 287/2016 has not even been voted, the recommendation is that it represents a minimum level for the next pension reform.