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Robustness of Multiple Equilibria in OLG Economies

  • Guido Cazzavillan

    (Universita Ca' Foscari di Venezia)

  • Patrick A. Pintus

    (Universite de la Mediterranee Aix-Marseilles II)

This paper extends the standard Diamond's two-period OLG model of capital accumulation by introducing labor-leisure choice into the first-period of agents' life. Under the assumption of gross substitutability, we show that multiple intertemporal equilibria require both highly complementary inputs and a low fraction of consumption out of wage income by the young generation. On the contrary, if capital and labor are sufficiently substitutable, or if young agents consume a realistically large proportion of their wage income, multiple intertemporal equilibria and, therefore, endogenous fluctuations driven by self-fulfilling beliefs, are ruled out. We further illustrate, in contrast with the related literature, that intertemporal substitution in consumption across periods is a critical mechanism which enables short-lived agents to arbitrage away expectationally driven fluctuations when the ratio between saving and wage is reasonably low. As a result, the OLG model's predictions are substantially similar to the usual optimal growth model. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2003.10.001
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 7 (2004)
Issue (Month): 2 (April)
Pages: 456-475

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Handle: RePEc:red:issued:v:7:y:2004:i:2:p:456-475
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