Active Intermediation In A Monetary Overlapping Generations Economy

In Pingle and Tesfatsion (1991) we question whether the conventional definition of a competitive equilibrium, as applied to an overlapping generations economy, is truly satisfactory. The conventional definition was developed for a standard Walrasian economy with a finite number of consumers and goods whereas the overlapping generations economy necessarily contains an infinite number of consumers and goods. As noted by Shell (1971), the presence of this double infinity in overlapping generations economies introduces a new trading opportunity: namely, the possibility of incurring and rolling over a debt forever as time proceeds into the infinite future. The problem with applying the conventional equilibrium definition to the overlapping generations economy is that it does not contain any conditions that recognize this new trading opportunity. Rather, private agents are assumed to focus narrowly on consumption and production opportunities, ignoring possible profit opportunities arising from debt issue and roll over.