NotesontheOLGModel.PDFVIP

Notes on the OLG Model Pengfei Wang Hong Kong University of Science and Technology 2010 pfwang (Institute) Notes on the OLG Model 03/09 1 / 24 Introduction? Introduced by Samuelson (1958). It contains agents who are born at di¤rent dates and have …nite lifetimes, even though the economy goes on forever. competitive equilibria in the OLG model may not to be Pareto optimal A closely related feature of the model is that it has a role for …at money (Bubble) pfwang (Institute) Notes on the OLG Model 03/09 2 / 24 The Basic Model Suppose that t = 1, 2, ...., and that at every date t there is born a new generation Gt of individuals who live for two periods. There is also a generation G0 around at t = 1 who only live for one period, called the initial old. every generation consists of a [0, 1] continuum of homogeneous agents. pfwang (Institute) Notes on the OLG Model 03/09 3 / 24 The Basic Model (continued) Let c1t and c2t+1 denote consumption of an individual from Gt , t 1, in the 1st and 2nd periods of life  Let e1 and e2 denote his (time-invariant) endowments in the 1st and 2nd periods of life. His utility function u(c1t , c2t+1) is strictly increasing and quasi-concave. Members of generation G0 consume only c21 and are endowed with only e2. pfwang (Institute) Notes on the OLG Model 03/09 4 / 24 Recursive Competitive Equilibrium (RCE) Let st denote savings or loans by a member of Gt at t, and Rt the gross (principal plus interest) return on savings between t and t + 1. for t 1, a member of Gt at t solves  ma