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.File | Dimensione | Formato | |
---|---|---|---|
1-s2.0-S1094202503000905-main.pdf
non disponibili
Tipologia:
Abstract
Licenza:
Licenza non definita
Dimensione
278.61 kB
Formato
Adobe PDF
|
278.61 kB | Adobe PDF | Visualizza/Apri |
I documenti in ARCA sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.