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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 household’s 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 θ – The discount rate ρ >  1. t t L n L ) 1 ( 1 + = + ) ( 1 1 ) ( 1 , 2 , 1 + + + t t C u C u ρ 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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This note was uploaded on 01/09/2011 for the course ECON 7230 taught by Professor Feigenbaum during the Spring '10 term at Utah Valley University.
 Spring '10
 Feigenbaum
 Macroeconomics, Interest Rates

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