L5 - The Life-cycle Model • Chapters 2 and 3, textbook 2...

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Unformatted text preview: The Life-cycle Model • Chapters 2 and 3, textbook 2 • Describe the model • Market clearing prices • The individual lifetime budget constraint and utility maximization • Derive the transitional equation 1 Features of the model • The model is built on ingredients introduced in previous studies. • Here we make the description of the model complete: – Who act in the economy? – What are their preferences? – What do they know? – How do they produce? – How do they interact? 2 • Completeness of the model permits general equilibrium analysis: – People maximize their preferences. – Markets are cleared. • In particular, saving is endogenous so the model – provides a better understanding to the growth theory; – illustrates some key points of the real business cycle theory; – permits serious discussion of important fiscal policy such as social security. 3 The Basic Setup of the Model • At the start of each period, there are N (identical) persons born. • Each newly born person lives for two period. That is, a person who is born at the start of period t dies in the end of period t+1.who is born at the start of period t dies in the end of period t+1....
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This note was uploaded on 10/19/2008 for the course ECON 3140 taught by Professor Mbiekop during the Fall '07 term at Cornell University (Engineering School).

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L5 - The Life-cycle Model • Chapters 2 and 3, textbook 2...

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