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Nonmonetary steady states in stationary overlapping generations models with long lived agents and discounting: Multiplicity, optimality, and consumption smoothing

  • Rao Aiyagari, S.

We construct a sequence of pure exchange, stationary OLG economies in which generations have longer and longer life spans and all agents maximize a discounted sum of utilities with a fixed, positive, and common discount rate. Period utility functions and endowment patterns are subject to mild restrictions and within generation heterogeneity is permitted. We show that: (i) Every sequence of equilibrium interest rates converges to the discount rate. (ii) Eventually every nonmonetary steady state is optimal and a monetary steady state will never exist. (iii) For any agent consumption at any fixed age converges to permanent income evaluated using the utility discount rate.

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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 45 (1988)
Issue (Month): 1 (June)
Pages: 102-127

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Handle: RePEc:eee:jetheo:v:45:y:1988:i:1:p:102-127
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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  1. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Growth with Many Consumers," Discussion Papers 518, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. 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.
  3. Kehoe, Timothy J & Levine, David K, 1985. "Comparative Statics and Perfect Foresight in Infinite Horizon Economies," Econometrica, Econometric Society, vol. 53(2), pages 433-53, March.
  4. Brock, William A. & Mirman, Leonard J., 1972. "Optimal economic growth and uncertainty: The discounted case," Journal of Economic Theory, Elsevier, vol. 4(3), pages 479-513, June.
  5. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
  6. Spear, Stephen E., 1985. "Rational expectations in the overlapping generations model," Journal of Economic Theory, Elsevier, vol. 35(2), pages 251-275, August.
  7. 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.
  8. Wilson, Charles A., 1981. "Equilibrium in dynamic models with an infinity of agents," Journal of Economic Theory, Elsevier, vol. 24(1), pages 95-111, February.
  9. Epstein, Larry G., 1983. "Stationary cardinal utility and optimal growth under uncertainty," Journal of Economic Theory, Elsevier, vol. 31(1), pages 133-152, October.
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