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Robustness of Multiple Equilibria in OLG Economies

Author

Listed:
  • Guido Cazzavillan

    (Universita Ca' Foscari di Venezia)

  • Patrick A. Pintus

    (Universite de la Mediterranee Aix-Marseilles II)

Abstract

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)

Suggested Citation

  • Guido Cazzavillan & Patrick A. Pintus, 2004. "Robustness of Multiple Equilibria in OLG Economies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(2), pages 456-475, April.
    • Handle: RePEc:red:issued:v:7:y:2004:i:2:p:456-475
    DOI: 10.1016/j.red.2003.10.001
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    References listed on IDEAS

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    More about this item

    Keywords

    overlapping generations; endogenous labor supply; gross substitutability; multiple equilibria; endogenous fluctuations.;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium

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