Pensions as Research and Production Subsidies

We consider an overlapping generations economy where capital is produced from bank loans under stochastic constant returns to scale, and subject to idiosyncratic shocks whose realisations are costly to verify. Our formulation differs from earlier work in permitting investment projects to be infinitely divisible and private agency costs to be convex. If there are external economies to financial intermediation, then deviations from steady-state output are negatively correlated with the spread between loan and deposit rates. Moreover, the capital stock correspondence is set-valued, a result consistent with poverty traps, growth cycles, and humpshaped impulse response functions. This paper investigates how nonconvexities in financial intermediation, particularly in the cost of collecting private information about borrowers, enrich the operating characteristics of a simple, and relatively tractable, onesector growth model. The enriched set of equilibria is consistent with a number of phenomena that are hard to reconcile with convex models of economic growth: poverty traps, rank reversals, growth cycles and humpshaped impulse response functions are all possible outcomes of nonconvex information costs. Bankers and economists alike have long regarded the credit market as key to understanding economic development and to transmitting cyclical shocks through modern industrial economies. The growth branch of this literature starts with Gurley and Shaw (1967) who note that economic growth is almost universally accompanied by financial deepening, that is, by more intensive use of external finance in investment and by a gradual lifting of distortions in the credit market. The cyclical fluctuations branch of the literature focuses on the connection between credit market conditions and business cycles; a key concern here is how the credit market propagates and amplifies external shocks through the entire economy. The general idea dates back at least to Keynes, Fisher, and Friedman and Schwartz who argued that adverse conditions in financial markets may have exacerbated the effects of prewar recessions, including the Great Depression. Greenwood and Smith (1995) survey work on development. Among recent contributions, we note Bencivenga and Smith (1991) who study the growth effects of financial intermediation in an overlapping generations model with uncertain liquidity needs. Intermediation enhances growth because banks are efficient providers of liquidity which frees individuals from the need to maintain low yielding liquid assets. Similar results are obtained in Greenwood and Jovanovic (1990), where intermediary institutions are shown to arise

Based on a thorough comparison of the basic assumptions and economic underpinning of the Ramsey and over lapping generation (OLG) model, this study builds both static and dynamic computable general equilibrium tax policy models to analyze the effect of tax reform on Taiwan’s economy. The new tax structure considers mainly a replacement of some parts of labor and capital income taxes by consumption tax. The benchmark year of the model is 2001, and the economy is divided into four sectors. The modeling framework is implemented on top of MPSGE, which is a special module within the General Algebraic Modeling System (GAMS). Our simulation results show differential outcomes for static and dynamic models. The slower speed of transition inherent in OLG model has caused variables such as welfare, capital stock, and replacement consumption tax rate change less than that in the Ramsey model when the tax reform policy is imposed. And the intergeneration effects of different tax burden between young and old generations can be found in the OLG model but not in the Ramsey model.

This study introduces financial intermediaries into the Schumpeterian growth model developed by Aghion et al. (2005, Quarterly Journal of Economics, Vol. 120, pp. 173–222). They collect deposits from households, provide funds for entrepreneurial projects, and monitor the entrepreneurs. I consider an economy with moral hazard problems: entrepreneurs can hide the result of a successful innovation and thereby avoid repaying financial intermediaries if the latter do not monitor entrepreneurial performance. I analyze the effects of financial intermediaries' activities on technological progress and economic growth in such an economy. I show that financial intermediaries need to monitor entrepreneurs in an economy where the legal protection of creditors is not strong enough. Such monitoring can resolve the moral hazard problem; however, it does not always promote technological innovation, because it could increase the cost of entrepreneurial innovation and thus reduce the amount invested for innovation. I also examine how monitoring by financial intermediaries affects the welfare of individuals through the stringency of financial markets.

In this paper, we explore the proposition that the optimal capital income tax is zero using an overlapping generations model. We prove that for a large class of preferences, the optimal capital income tax along the transition path and in steady state is non-zero. For a version of the model calibrated to the US economy, we nd that the model could justify the observed rates of capital income taxation for an empirically reasonable intertemporal utility function and a robust demographic structure.

A characterization of erratic dynamics in, the overlapping generations model

We study fixed price temporary equilibria (with rationing) and sequences of temporary equilibria in a three commodities (goods, labor, bonds) overlapping generations model with endogenous investment. Young consumers, living two periods, work, consume, and buy bonds for financing next period's consumption. New firms, existing for two periods, make a production plan for the next period, taking into account expected rationing, assumed similar to present rationing. The plan determines the amount of goods to buy as capital, financed by bonds. Old firms produce, using labor and the previously bought capital. Different regimes exist and expectations can be self-fulfilling and self-destroying.

Grandmont [7] was among the first to study the possibility of self-sustaining cycles in the overlapping generations models. In his paper, the origin of these cycles is the conflict between the substitution effect and the income effect due to variations of relative prices. Grandmont’s approach has been criticized on empirical basis: income effects in the model are too large compared to their values in real life. Our paper, conversely, provides some theoretical arguments that explains why cyclical and complex paths cannot be ruled out. In this view, we examine the problem of endogenous fluctuations in pure exchange economies from the viewpoint of macroeconomic theories of consumption and saving.KeywordsUtility FunctionIncome EffectSteady State EquilibriumAggregate ConsumptionMarginal PropensityThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Rational expectations in the overlapping generations model

Stochastic processes of temporary equilibria

We study perfect foresight competitive equilibrium in an overlapping generations model with productive capital and a fixed nominal stock of money. We obtain almost-complete characterizations of (a) the existence of a monetary equilibrium from an arbitrary initial capital stock, and (b) the existence of anefficient monetary equilibrium from an arbitrary initial capital stock. When the initial capital stock is no larger than the golden rule stock, the necessary and sufficient condition for both (a) and (b) is the dynamic inefficiency (in the sense of Malinvaud) of the autarkic (or nonmonetary) equilibrium from the same initial stock. However, this condition, though necessary, isnot sufficient for the existence of a monetary equilibrium when the initial stock exceeds the golden rule stock (and still more conditions are needed for anefficient monetary equilibrium to exist). We provide characterizations for these cases, and as corollaries obtain examples in which (a) the nonmonetary equilibrium is inefficient but no monetary equilibrium exists, and (b) monetary equilibria exist but no efficient monetary equilibrium does.

We examine a model in which the utility function has been engineered so that it is optimal for consumers to aim for a fixed target level of retirement resources. In this case, consumption displays excess sensitivity to current income as well as perfect old age insurance. In an overlapping generations model, this leads naturally to multiple and unstable equilibria. Under static expectations, it also leads to a well-defined dynamics, including possible historical traps, implosions involving ever-diminishing capital stock and ever-increasing interest rates, and the feasibility of optimal one-time interventions.

Why do monetary policies matter? An experimental study of saving and inflation in an overlapping generations model

The Sargent and Wallace paper has stimulated a debate concerning the relative size of the growth rate vs. the after-tax interest rate, and two different approaches have been followed in this debate. One approach is to simply compare the historical data on the growth rate and the discount rate, and the other approach is to consider optimizing under-pinnings. Darby [8] and McCallum [12] have emphasized that bond-financed deficits are feasible if the growth rate exceeds the discount rate, and, following the first approach, Darby interprets the empirical evidence for the U.S. as showing that this condition is met. Miller and Sargent [14] have replied to Darby, noting that the growth rate exceeding the interest rate condition is only necessary, not sufficient for the feasibility of bond-financing. They also emphasize that a period involving bond-financed deficits may raise interest rates, so that the growth rate should eventually be too low, as it has been in the U.S. since 1980. The alternative reaction to the growth rate vs. the interest rate debate is taken in McCallum [13]. His microeconomic analysis involved infinitely-lived agents with money directly entering the utility function, and his conclusion is that the conditions of optimizing behaviour preclude the growth rate from exceeding the interest rate. Burbidge [6] reaches the same conclusion with an overlapping generations model. However, Buiter and Carmichael [5] and Aiyagari [1] use overlapping generations models which do permit the growth rate to exceed the interest rate. Furthermore, Aiyagari emphasizes that higher deficits need not lead to higher interest rates, as long as the distribution of wealth across young and old agents is not affected by the deficit. What general conclusion can be drawn from these studies? In short, none. Theorists have demonstrated that they do not have a common view regarding the specification of optimizing models, and different historical periods can be cited to support either relative

This chapter introduces the basic Ramsey model of consumer behaviour as a microfoundation for aggregate macroeconomic behaviour. Versions of the model with and without discounting are considered. The model is augmented to include production and labour in the production function. Investment is also analysed and short-run dynamics of the model are discussed. Finally, the overlapping generations model is considered the relation between the overlapping generations model and the Ramsey model is explained.

This work develops an overlapping generations model in order to analyze a transition to a partial privatization of the social security system. We find that such a reform induces a vertical segmentation in the market of pension schemes. Moreover the redistributive aim of the government is limited by the possibility to switch from the private to the public pension scheme.