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Active Intermediation In Overlapping Generations Economies With Production And Unsecured Debt

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  • Pingle, Mark
  • Tesfatsion, Leigh

Abstract

It is well known that the first welfare theorem can fail foroverlapping generations economies with private production andunsecured debt. This paper demonstrates that the reason for thisfailure is that intermediation is modeled as a purely passivecoordination activity implemented by a Walrasian Auctioneer. Whenintermediation is modeled instead as a contestable activity carriedout by a corporate intermediary owned by consumer-shareholders andoperated in their interest, every equilibrium is Pareto efficient.In broader terms, these findings caution that the inefficiency observed in standard modelings of overlapping generations economiesmay not be the reflection of an intrinsic market failure. Rather,the observed inefficiency could instead be due to a fundamentalincompleteness in the model specification the presumed inability ofprivate agents to exploit the earnings opportunities associated with incurring and forever rolling over debt.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 2 (1998)
Issue (Month): 02 (June)
Pages: 183-212

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Handle: RePEc:cup:macdyn:v:2:y:1998:i:02:p:183-212_00

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  1. Pingle, M. & Tesfatsion, Leigh S., 1991. "Overlapping Generations, Intermediation, and the First Welfare Theorem," Staff General Research Papers 11185, Iowa State University, Department of Economics.
  2. GRANDMONT, Jean-Michel & LAROQUE, Guy, . "Money in the pure consumption loan model," CORE Discussion Papers RP -152, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
  4. Balasko, Yves & Shell, Karl, 1980. "The overlapping-generations model, I: The case of pure exchange without money," Journal of Economic Theory, Elsevier, vol. 23(3), pages 281-306, December.
  5. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  6. Grandmont Jean-michel, 1983. "On endogenous competitive business cycles," CEPREMAP Working Papers (Couverture Orange) 8316, CEPREMAP.
  7. Bryant, John, 1981. "Bank Collapse and Depression," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 13(4), pages 454-64, November.
  8. Balasko, Yves & Shell, Karl, 1981. "The overlapping-generations model. II. The case of pure exchange with money," Journal of Economic Theory, Elsevier, vol. 24(1), pages 112-142, February.
  9. Gale, David, 1973. "Pure exchange equilibrium of dynamic economic models," Journal of Economic Theory, Elsevier, vol. 6(1), pages 12-36, February.
  10. Mark Gertler, 1988. "Financial structure and aggregate economic activity: an overview," Proceedings, Federal Reserve Bank of Cleveland, pages 559-596.
  11. Hannan, Timothy H & Berger, Allen N, 1991. "The Rigidity of Prices: Evidence from the Banking Industry," American Economic Review, American Economic Association, vol. 81(4), pages 938-45, September.
  12. Pingle, Mark & Tesfatsion, Leigh, 1998. "Active intermediation in a monetary overlapping generations economy1," Journal of Economic Dynamics and Control, Elsevier, vol. 22(10), pages 1543-1574, August.
  13. David Cass & Menahem E. Yaari, 1965. "A Re-Examination of the Pure Consumption Loans Model," Cowles Foundation Discussion Papers 195, Cowles Foundation for Research in Economics, Yale University.
  14. Mark Pingle & Leigh Tesfatsion, 1993. "``Active Intermediation in a Monetary Overlapping Generations Economy''," Macroeconomics 9312001, EconWPA, revised 04 Dec 1993.
  15. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
  16. Leigh TESFATSION, 1995. "How Economists Can Get Alife," Economic Report 37, Iowa State University Department of Economics.
  17. Bennett T. McCallum, 1988. "The Optimal Inflation Rate in an Overlapping-Generations Economy with Land," NBER Working Papers 1892, National Bureau of Economic Research, Inc.
  18. Champ,Bruce & Freeman,Scott & Haslag,Joseph, 2011. "Modeling Monetary Economies," Cambridge Books, Cambridge University Press, number 9780521177009, December.
  19. Shell, Karl, 1971. "Notes on the Economics of Infinity," Journal of Political Economy, University of Chicago Press, vol. 79(5), pages 1002-11, Sept.-Oct.
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Cited by:
  1. Magill, Michael & Quinzii, Martine, 2003. "Nonshiftable capital, affine price expectations and convergence to the Golden Rule," Journal of Mathematical Economics, Elsevier, vol. 39(3-4), pages 239-272, June.
  2. Tesfatsion, Leigh, 2006. "Agent-Based Computational Modeling And Macroeconomics," Staff General Research Papers 12402, Iowa State University, Department of Economics.
  3. Michael Magill & Martine Quinzii, . "The Stock Market in the Overlapping Generations," Department of Economics 99-13, California Davis - Department of Economics.

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