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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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  • Mohanad Ismael, 2010. "Transaction costs in an overlapping generations model," Documents de recherche 10-07, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
    • Handle: RePEc:eve:wpaper:10-07
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    Keywords

    Transaction costs; Overlapping generations; Determinacy; Cycles of period two;
    All these keywords.

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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