This paper extends the standard Diamond’s two-period OLG model of capital accumulation by introducing labor–leisure choice into the first-period of agents’ life. Under the assumption of gross substitutability, we show that multiple intertemporal equilibria require both highly complementary inputs and a low fraction of consumption out of wage income by the young generation. On the contrary, if capital and labor are sufficiently substitutable, or if young agents consume a realistically large proportion of their wage income, multiple intertemporal equilibria and, therefore, endogenous fluctuations driven by self-fulfilling beliefs, are ruled out. We further illustrate, in contrast with the related literature, that intertemporal substitution in consumption across periods is a critical mechanism which enables short-lived agents to arbitrage away expectationally driven fluctuations when the ratio between saving and wage is reasonably low. As a result, the OLG model’s predictions are substantially similar to the usual optimal growth model.

Robustness of multiple equilibria in OLG economies

CAZZAVILLAN, Guido;
2004-01-01

Abstract

This paper extends the standard Diamond’s two-period OLG model of capital accumulation by introducing labor–leisure choice into the first-period of agents’ life. Under the assumption of gross substitutability, we show that multiple intertemporal equilibria require both highly complementary inputs and a low fraction of consumption out of wage income by the young generation. On the contrary, if capital and labor are sufficiently substitutable, or if young agents consume a realistically large proportion of their wage income, multiple intertemporal equilibria and, therefore, endogenous fluctuations driven by self-fulfilling beliefs, are ruled out. We further illustrate, in contrast with the related literature, that intertemporal substitution in consumption across periods is a critical mechanism which enables short-lived agents to arbitrage away expectationally driven fluctuations when the ratio between saving and wage is reasonably low. As a result, the OLG model’s predictions are substantially similar to the usual optimal growth model.
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10278/31119
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