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Transaction costs in an overlapping generations model

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Abstract

We study the stability properties of a Diamond (1965) overlapping generations model in which agents have to pay transaction costs related to the capital accumulated. In particular, these costs depend positively on the amount of individual's savings. At first, we show that under stan- dard conditions, the steady state may be dynamically inefficient (efficient) if there is an over-accumulation (under-accumulation) of capital with re- spect to Golden Rule. Namely, the introduction of transaction costs has a negative impact on capital accumulations. It is also shown that the stationary equilibrium is determinate. Further, transaction costs promote the emergence of cycles of period two and therefore acts as a destabiliz- ing factor. These results are robustly obtained by considering separable and non-separable preferences. The analytical findings are completed by a numerical example.

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Paper provided by Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne in its series Documents de recherche with number 10-07.

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Length: 22 pages
Date of creation: Nov 2010
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Handle: RePEc:eve:wpaper:10-07

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Keywords: Transaction costs; Overlapping generations; Determinacy; Cycles of period two;

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