Overlapping Generations Economy Research Articles

Public Investment Criterion in an Overlapping Generations Economy

This paper extends the Sandmo-Dreze model of public investment to the overlapping generations model, where each person lives for two periods, working in the first and retired in the second. It is shown that in a (non-) tax-distorted economy with (without) the corporation income tax, if government surplus can be redistributed between younger and older generations, then the second-best (optimal) discount rate for public investment in steady states should be not only the weighted average formula (the market rate of interest) derived by Sandmo and Dreze (Economica, 1971) but also the population growth rate.

Optimal and time consistent exchange-rate management in an overlapping-generations economy

This paper analyzes exchange-rate management in a simple overlapping generations model. This framework is used to evaluate alternative policies in terms of their implications for the welfare of individuals in the economy and for generating seigniorage. When the chief concern is to provide a desirable store of value, a policy of fixing the exchange rate does better when shocks are primarily of domestic origin while floating becomes more desirable when foreign shocks predominate. The same is true when the government is concerned with maximizing total expected seigniorage, although more intervention is typically desirable when generating seigniorage is the major objective. When seigniorage concerns are paramount and when the monetary authority cannot establish a reputation for conducting monetary policy in a way that makes the currency a desirable store of value, a national currency may not be viable in the absence of exchange controls. Such controls may be justified in this situation.

Welfare implications of net social security wealth

Real net social wealth (NSSW), the real present value of social security benefits received minus social security taxes paid, is frequently used as a direct proxy measure for the impact of a social security system on generation welfare. The present paper establishes to the contrary, for a class of overlapping generation economies, that NSSW can be simultaneously negatively correlated with welfare for every agent in every generation. More generally, the paper determines the extent to which social security is needed in these economies to ensure social optimality, and investigates the proper subset of economies for which NSSW and generation welfare exhibit positive correlation.

Regularity in overlapping generations exchange economies

In this paper we develop a regularity theory for stationary overlapping generations economies. We show that generically there is an odd number of steady states in which a non-zero amount of nominal debt (fiat money) is passed from generation to generation and an odd number in which there is no nominal debt. We are also interested in non-steady state perfect foresight paths. As a first step in this direction we analyze the behavior of paths near a steady state. We show that generically they are given by a second order difference equation that satisfies strong regularity properties. Economic theory alone imposes little restriction on those paths: With n goods and consumers who live for m periods, for example, the only restriction on the set of paths converging to the steady state is that they form a manifold of dimension no less than one, no more than 2 nm.

Approximately monetary equilibrium in overlapping generations economy

This paper treats the consumption-loan model with fiat money. The question of existence of monetary equilibria in these economies is the topic of our study. We introduce a new concept of Approximately Monetary Equilibrium. We show that it is not true that whenever there is no Pareto-efficient non-monetary equilibrium then there is a monetary one. However, in this case, there exists an approximately monetary equilibrium.

Existence of competitive equilibrium in a general overlapping-generations model

In the companion paper [2], Balasko and Shell establish existence of competitive equilibrium for a pure-distribution, overlapping-generations economy without money (see, especially, Propositions (3.10) and (3.11) in Section 3). That argument is remarkably simple, but depends critically on some strong hypotheses concerning individual tastes and endowments. In particular, it is assumed that, in any given period, every living consumer has a utility function which is strictly increasing in every available commodity, as well as an endowment which is strictly positive in every available commodity. These two assumptions are especially difficult to rationalize in an intergenerational context. How many teen-agers do you know who are eager viewers of Lawrence Welk? How many “middle-agers” who are likely users of Clearasil? So much for increasing (much less strictly increasing) utility functions! Regarding strictly positive endowments, we invite the reader to dream up his/her own counterexamples. (Another hint: How do you respond to the commonly heard lament, “What I wouldn’t give to be young again!“?) In the present paper, we do away with such unrealistically severe hypotheses. And we do more. Following the Arrow-Debreu tradition, we postulate fairly mild conditions on individual tastes and endowments. Of course, in line with the same tradition, we must then impose some further conditions on the potential economic interrelationships among consumers. This additional structure is an application to the overlapping-generations model of McKenzie’s basic concept of irreducibility.