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Unformatted text preview: Lecture 9 Diamond Overlapping Generations Model ECON 7240 IX  2 Unrealism of Dynastic Model CKR model assumes households last forever. In the real world, most people save for retirement, but CKR has no retirement. Households save because of high interest rates. Each households wealth grows at the constant rate g + n . True of the Gateses and Buffetts but few others. ECON 7240 IX  3 Lifecycle Models In lifecycle models agents have a finite lifespan. Labor income is a function of age. Agents save to finance consumption during a retirement period of low income before death. In an overlapping generations (OLG) model, agents of different ages coexist. In each period, old agents die and young agents are born to replace them. ECON 7240 IX  4 TwoPeriod Model Time is discrete. The population L t grows at the rate n . A consumer lives for two periods and maximizes Utility is CRRA with risk aversion The discount rate >  1. t t L n L ) 1 ( 1 + = + ) ( 1 1 ) ( 1 , 2 , 1 + + + t t C u C u ECON 7240 IX  5 Closing the Model The production sector is the same as in the Solow and CKR models. A t +1 = (1 + g ) A t For simplicity, we assume young agents have one unit of labor and old agents have none....
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 Spring '10
 Feigenbaum
 Macroeconomics, Interest Rates

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