Showing papers on "Overlapping generations model published in 1995"

A life cycle analysis of social security

Abstract: We develop an applied general equilibrium model to examine the optimal social security replacement rate and the welfare benefits associated with it. Our setup consists of overlapping generations of 65-period lived individuals facing mortality risk and individual income risk. Private credit markets, including markets for private annuities, are closed by assumption. Unlike previous analyses, we find that an unfunded social security system may well enhance economic welfare. In our benchmark economy, the optimal social security replacement rate is 30%, and an empirically more plausible replacement rate of 60% raises welfare compared with an economy with no social security system.

Temporal allele frequency change and estimation of effective size in populations with overlapping generations.

Abstract: In this paper we study the process of allele frequency change in finite populations with overlapping generations with the purpose of evaluating the possibility of estimating the effective size from observations of temporal frequency shifts of selectively neutral alleles. Focusing on allele frequency changes between successive cohorts (individuals born in particular years), we show that such changes are not determined by the effective population size alone, as they are when generations are discrete. Rather, in populations with overlapping generations, the amount of temporal allele frequency change is dependent on the age-specific survival and birth rates. Taking this phenomenon into account, we present an estimator for effective size that can be applied to populations with overlapping generations.

The Effects of Annuities, Bequests, and Aging in an Overlapping Generations Model of Endogenous Growth

Abstract: We examine the effects of introducing actuarially fair annuity markets into an overlapping generations model of endogenous growth. The complete annuitisation of agents' wealth is not, in general, dynamically optimal; the degree of annuitisation that is dynamically optimal depends nonmonotonically on the expected length of retirement and on the pay-as-you-go social security tax rate. The government has an incentive to restrict the availability of actuarially fair annuities contracts, and can often move the economy from a pay-as-you-go to a fully-funded social security system via voluntary contributions to a government sponsored, actuarially fair pension today accompanied by reductions in social security taxes tomorrow.

Endogenous growth, human capital, and bequests in a life-cycle model

Abstract: This paper investigates the relationship between growth and efficiency in an overlapping generations economy in which altruistic parents endow their children with human capital (education) and leave physical bequests. The author gives conditions under which the physical bequest motive is not operative in a balanced equilibrium when human capital exhibits externalities. He also shows that the efficient rate of growth is lower than the competitive one if the economy is bequest-constrained and externalities from education are not very strong. Some fiscal policy experiments are performed for both bequest-constrained economies and unconstrained ones. Copyright 1995 by Royal Economic Society.

Progressive taxes, equity, and human capital accumulation in an endegenous growth model with overlapping generations

Abstract: Abstract This paper explores the trade-off between efficiency and intra- and intergenerational equity in an endogenous growth model of an open economy with overlapping generations and human capital accumulation. We demonstrate that progressive taxes hurt long-run growth and exacerbate distortions associated with intergenerational spillovers. However, by raising saving, these taxes strengthen the net foreign asset position.

Correlated Equilibrium and Sunspot Equilibrium

Abstract: We show by an example that the sunspot equilibria of a competitive economy are not equivalent to the correlated equilibria if sunspots generate transfers between (extrinsic) states of nature (through a contingent commodities market). Nevertheless, we prove that the sunspot equilibrium allocations of a standard overlapping generations economy coincide with the (strategic form) correlated equilibrium allocations of a natural market game mimicking the economy.

Equilibria with social security

Abstract: We model pay-as-you-go (PAYG) social sucurity systems as the outcome of majority voting within a standard OLG model with production and an exogenous population growth rateo At each point in time individuals work, save, consume and invest by taking the social security policy as given. The latter consists of a tax on current wages transferred to elderly people. When they vote, individuals have to make two choices: If they want to keep the committment made by the previous generation by paying the elderly the promised amount of benefits, and which amount they want paid to themselves next periodo We show that when the growth rate of population is high enough compared to the productivity of capital there exists an equilibrium where PAYG pensions are voted into existence and maintained. PAYG systems are kept even when everybody knows that they will surely be abondoned, and that some generation will pay and not be paid back. We characterize the steady state and dynamic properties of these equilibria and study their welfare properties. Equilibria achieved by voting are typically inefficient; however, they may be so due to overaccumulation, as well as, in other cases, due to under accumulation. On the other hand, the efficient steady states turn out to be dynamically unstable: so we are presenting an unpleasant alternative for policy making.

Capital mobility, fiscal policy, and growth under self-financing of human capital formation

Abstract: This paper, which is to appear in a volume honoring the memory of Doug Purvis, considers the effects of fiscal and financial policy on economic growth in open and closed economies, when human capital formation by young households is constrained by the illi- quidity of human wealth. Both endogeneous and exogenous growth versions of the basic OLG model are analysed. We find that intergenerational redistribution policies that discourage physical capital formation may encourage human capital formation. Despite common tech- nologies and perfect international mobility of financial capital, the noti-tradedness of human capital and the illiquidity of human wealth make for persistent differences in productivity growth rates (in the endogenous growth version of the model) or in their levels (in the exogenous growth version). We also consider the productivity growth (or level) effects of public spending on education and of the distortionary taxation of financial asset income.

Market Power in Macroeconomic Models: New Developments

Abstract: Earlier work on the market-power foundations of macroeconomics (see Silvestre, Journal of Economic Literature, 1993) adopted static or temporary equilibrium models. This paper surveys the more recent litterature, which is explicitly dynamic (models of overlapping generations, equilibrium fluctuations or neoclassical growth). The issues discussed include: (a) unemployment at low wages; (b) redistributive policies: (c) public expenditures (d) partial wage indexation, and (e) the equilibrium analysis of economic fluctuations.

Dynamic Effects of Tariff Liberalization: an Intertemporal Cge Approach*

Abstract: The paper presents a multisectoral CGE model with overlapping generations in which intertemporal optimization by households and firms determines savings and investment under perfect foresight. We calibrate the model to Austrian data and simulate a unilateral tariff liberalization scenario. We find that unilateral tariff reductions are expansionary in the long-run but involve considerable diversity in sectoral adjustment. Foreign debt increases in the long-run, causing an improvement in the trade balance. In terms of welfare, some old generations gain at the expense of young and future generations. Budgetary policies are shown to be crucial for several effects.

Technological Progress and Income Inequality

Abstract: This paper examines the effects of Hicks-neutral, Harrod-neutral, and Solow-neutral technological improvements on the distribution of income in an overlapping generations economy with endogenous labor supply and a bequest motive. Income inequality in this model is generated by a stochastic process representing random variations in intergenerational transfers and pure luck. The comparative dynamics analysis trace the effects of the aforementioned technological changes in each and every period after they occur. These effects depend on the nature of the technological change and on the elasticity of substitution.

Underemployment, irreversibilities and growth under Trade Unionism

Abstract: The effects of irreversibility and uncertainty are analyzed in a unionized economy with overlapping generations Irreversible decisions about technology and physical and human capital are made under uncertainty and generate underutilization of labor and equipment not only over the convergence path, but also at steady state The related inefficiency negatively affects the accumulation process by reducing the per-capita capital stock at teady state The effect of union power on capital is ambiguous and depends crucially on the presence of irreversible decisions

On learning and the stability of cycles

Abstract: We study a general equilibrium model where the multiplicity of stationary periodic perfect foresight equilibria is pervasive. We investigate the extent of which agents can learn to coordinate on stationary perfect foresight cycles. The example economy, taken from Grandmont (1985), is an endowment overlapping generations model with fiat money, where consumption in the first and second periods of life are not necessarily gross substitutes. Depending on the value of a preference parameter, the limiting backward (direction of time reversed) perfect foresight dynamics are characterized by steady state, periodic, or chaotic trajectories for real money balances. We relax the perfect foresight assumption and examine how a population of artificial, heterogeneous adaptive agents might learn in such an environment. These artificial agents optimize given their forecasts of future prices, and they use forecast rules that are consistent with steady state or periodic trajectories for prices. The agents' forecast rules are updated by a genetic algorithm. We find that the population of artificial adaptive agents is able to eventually coordinate on steady state and low-order cycles, but not on the higher-order periodic equilibria that exist under the perfect foresight assumption.

Dynamic Effects of Trade in Financial Services

Abstract: An overlapping generations model is used to examine the dynamic implications of trade in financial services. The model highlights the role of finance, through capital accumulation, in the growth process. Emphasis is placed on the dynamic relationship between financial intermediation and the evolution of the capital stock. This relationship has positive implications for the paths of income and consumption and for the inter-generational distribution of income. The results provide formal support for the argument that liberalizing trade in financial services implies dynamic effects grounded in the basic sources of comparative advantage. [F11, F43]

Transition and Financial Collapse

Abstract: One of the many problems facing the countries in transition from socialism to capitalism after the initial phase of privatization and restructuring is the lack of proven entrepreneurial talent in addition to a low initial level of capital. New entrepreneurs might find it hard to finance their start-up enterprises. This paper therefore argues that a financial collapse and thus a collapse of the new entrepreneurial sector might occur. First, the lack of financial intermediation in transition economies is examined empirically before proceeding to a theoretical model. Using IMF data on claims to the private sector, we find that the extent of financial intermediation in these countries is comparable to developing rather than industrialized countries. The theoretical part analyzes an overlapping generations model with heterogenous entrepreneurial qualities and private information. A financial collapse can result, if young agents are too poor to provide enough collateral for financing a small project to prove their qualities as entrepreneur and no proven middle-aged entrepreneurs are available who can be entrusted with enough funds to run big projects. In that case, the economy contracts to an agricultural steady state. Possible remedies are discussed. In particular, large inequality or a large-scale, long-lasting government program of subsidizing investment help to overcome the danger of a financial collapse.

Human capital and economic growth in an overlapping generations model

Abstract: The paper describes an aggregative optimal growth model, the essential features of which are that individuals are mortal and obtain their labor skill through educational training. The process of human capital formation is described by an education function which relates the pass rate to the educational expenditure per student. Two alternative scenarios, private and public education regimes, are separately investigated. Under the decentralized education regime, risk-neutral individuals borrow to finance their education when young. Under the centralized education regime, the cost of education is financed by taxes imposed on the workers in the economy, and the central government maximizes a long-term social target function. The equilibria of both regimes are analyzed and various comparative static results derived. It is shown that educational investment in a decentralized equilibrium is higher than that in the centralized steady state. We also establish that there exists a time discount rate at which or above which the decentralized per capita consumption exceeds that of the centralized steady state whereas for time rates of discount sufficiently near the population growth rate, the above result will be reversed.

Piecemeal versus precipitous factor market integration

Abstract: textStudies the effects of speed of international factor markets integration within a general equilibrium, two country model. Variant of Diamond's overlapping generations model; Effects of an international factor market liberalization; Determination of the amount of capital needed to integrate Eastern Europe with the European Community.

Does a Constant Money Growth Rule Help Stabilize Inflation?: Experimental Evidence

Abstract: We design and study the behavior of experimental overlapping generations economies in which the government either finances real deficits through seigniorage or allows money supply to grow at a predetermined rate. We provide experimental data to study the conjecture that a “simple” rule, such as a constant growth of the money supply, can help coordinate agents' beliefs and help stabilize the economy. Our experimental data provide weak evidence for such a conjecture. The underlying stability parameters of the economy provide a better explanation of observed price volatility than differences in the policy do. In particular, in relatively unstable environments, subjects base their forecasts more on observed fluctuations than on the announcements of stable monetary policies.

Imperfect competition in an overlapping generations model : a case for fiscal policy

Abstract: Imperfect competition is a meaningful feature for macroeconomic analysis only to the extent that it leads to properties qualitatively different from those obtained under perfect competition. In particular, we have to wonder how imperfect competition per se may found an effective fiscal policy. For that matter we consider a simple overlapping generations model with firms acting as Cournot oligopolists in the good market. Through fiscal policy, a government, keeping the stock of money constant, redistributes wealth among generations and absorbs some of the output to provide public services. We show in this model that fiscal policy, by affecting firms’ market power, can move the economy across perfect foresight stationary equilibria along a Pareto improving path, or that it can implement a full employment stationary equilibrium which Pareto-dominates underemployment equilibria.

Sustainability and optimality of public debt

Abstract: The focus of this book is on the dynamics of public dept. It proves useful to consider the Solow growth model, the overlapping generations model and the infinite horizon model. Sustainability refers to the existence and the stability of the long-run equilibrium. The government can follow either of two strategies: it fixes the deficit ratio or the tax rate. By means of phase diagrams, we trace out the processes of adjustment induced by various macroeconomic shocks. In addition, different scenarios are reviewed: closed economy, the open economy, and two countries. The open economy adds the dynamics of the current account and of foreign dept.

On the Aggregation of Euler Equations for Consumption in Simple Overlapping-Generations Models

Abstract: If consumers have finite lives, the aggregate consumption growth equation is affected by entries and exits (births and deaths). We use two- and three-period overlapping-generations (OLG) models to show that entries and exits produce a relationship between aggregate con- sumption growth and the interest rate that is fundamentally different from the individual Euler equation for consumption. If aggregate data are used to estimate an 'aggregate' Euler equation, under plausible assumptions we show that the estimate of the elasticity of intertem- poral substitution is downward biased and that consumption growth exhibits excess sensitivity to labour income. Since Hall's (1978) paper, the life-cycle model of consumption has been exten- sively tested using aggregated consumption data. The assumption of an infin- itely lived representative agent has been exploited to justify using National Accounts data to estimate the structural parameters of the model. The moment restrictions implied by the first-order conditions of the representative agent intertemporal optimization problem have been used to such a purpose. When the over-identifying restrictions implied by the model are tested, they are typ- ically rejected. Furthermore, expected consumption changes are often found to be correlated with expected income changes (Campbell and Mankiw 1989). This indicates either a violation of the hypothesis of rational behaviour or, more likely, a violation of one of the many other assumptions used to make the model empirically operative. Surprisingly enough, aggregation issues have not received much attention as an explanation of the empirical failure of the model. Elsewhere (Attanasio and Weber 1993) we have shown how various aspects of aggregation, ranging from the issue of nonlinearities to the impossibility of controlling for individual variables that are likely to affect marginal utility, can explain the rejection of the model estimated on aggregate time-series data. In this paper we focus on another source of aggregation bias: finite lives and the lack of complete markets. If consumers are identical and infinitely lived, the Euler equation for con- sumption aggregates trivially. However, in the presence of finite lives and heterogeneous consumers, even though the Euler equation relating periods t and t + 1 holds for each set of similar consumers alive in those periods, when we consider aggregate consumption we do not necessarily have an aggregate Euler equation.