The Diamond OLG Model

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1、Chapter3TheDiamondOLGmodelIntoday’smacroeconomicstherearetwomainanalyticalframeworksforanalyzingthebasicintertemporalchoice,consumptionversussaving,anditsgeneralequilibriumimplicationsinthelongerrun:overlappinggenerationsmodelsandrepresentativeagentmodels.Inthefirstclassofmodelsthefocusison(a)t

2、heinteractionbetweendifferentgenerationsaliveatthesametime,and(b)thenever-endingentranceofnewgenerations.Inthesecondclassofmodelsthehouseholdsectorismodelledasconsistingofafinitenumberofinfinitely-livedagents.Oneinterpretationisthattheseagentsaredynastieswhereparentstaketheutilityoftheirdescendan

3、tsfullyintoaccountbyleavingbequests.Thisapproach,whichisalsocalledtheRamseyapproach(aftertheBritishmathematicianandeconomistFrankRamsey,1903-1930),willbediscussedinChapter8(discretetime)andChapter9and10(continuoustime).Inthischapterweintroducetheoverlappinggenerationsapproachwhichhasshownitsus

4、efulnessforanalysisofquestionsassociatedwithpublicdebtproblems,taxationofcapitalincome,financingofsocialsecurity(pensions),designofeducationalsystems,non-neutralityofmoney,andthepossibilityofspeculativebubbles.Wepresentanoverlappinggenerationsmodel(OLGmodelforshort)calledDiamond’sOLGmodel1after

5、theAmericaneconomistPeterA.Diamond(1940-).ThemodelextendstheoriginalcontributionsofAllais(1947)andSamuelson(1957)byincludingphysicalcapital.Amongthestrengthsofthemodelare:•Thelife-cycleaspectofhumanbehavioristakenintoaccount.Al-thoughtheeconomyisinfinitely-lived,theindividualagentshavefinitetime

6、horizons.Duringlifetimeone’seducationallevel,workingcapac-ity,income,andneedschangeandthisisreflectedintheindividual1Diamond(1965).5758CHAPTER3.THEDIAMONDOLGMODELlaborsupplyandsavingbehavior.Theaggregateimplicationsofthelife-cyclebehaviorofindividualagentsatdifferentstagesintheirlifeisatthecentr

7、eoftheOLGapproach.•Themodeltakeselementaryformsofheterogeneityintoaccount−youngversusold,currentlyaliveversusunbornwhosepreferencesarenotreflectedincurrentmarkettransactions.Questionsrelatingtothedistributionofincomeandwealthacrossgenera