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10 votes
Accepted

"If $\lambda$ is greater than than 1, the system explodes." Why does the system explode?

Eq. (2.64) can be written as (at first order) $$ k_{t+1} - k^* = \lambda (k_t - k^*) \tag{1a} $$ Define the quantity $\kappa_t$ as $$ \kappa_t \stackrel{\rm def}{=} k_t - k^* \tag{2} $$ So that ...
  • 1,206
6 votes

What is the true source of dynamic(Pareto) inefficiency in OLG models?

Shell 1971 argues (in a ten page paper, so read it!) that the dynamic inefficiency stems from the double infinity of traders and goods, and not the dynamics. This allows us to do the Hilbert hotel ...
5 votes

"If $\lambda$ is greater than than 1, the system explodes." Why does the system explode?

A system is explosive if its coefficients are non-stationary. Stationary is an important property to have in dynamic models as it tells us that an equilibrium value is obtainable (which is important ...
  • 7,910
4 votes

What is the true source of dynamic(Pareto) inefficiency in OLG models?

There is an unpublished 1982 working paper by Donald Brown and John Geanakoplos, called “Understanding Overlapping Generations Economies as a Lack of Market Clearing at Infinity” (a scan used to be ...
3 votes

In Diamond's OLG model, why is capital equal to saving by the young in previous period?

Property rights and assuming away bequest motives (the Old do no care about the Young). Capital of the previous period belongs to the Old, and since they will die at the and of old age, the finite-...
3 votes
Accepted

OLG - Government Budget Constraint

The interest component is already included. It was just their way of writing out the budget constraint that confused me. If anyone is interested: $\frac{B_{t-1}}{p_{t}} - \frac{B_{t}}{(1+i_{t})p_{t}} ...
  • 651
2 votes

How do I find out which form of utility function is being used?

I would call this a mean-variance utility function. The agent likes higher mean values, which is the first term, but trades that off against higher variance, which is the second term. If the random ...
  • 394
2 votes
Accepted

State variable or jump variable

I'm assuming pollution is a bad in consumer utility (as is typically seen) or otherwise relevant to some agent's payoffs -- if it's not, then $P_t$ is irrelevant and you might as well ignore it. $P_t$ ...
2 votes
Accepted

Are overlapping generation (OLG) models extensions of a DSGE model?

You can find OLG models that do not classify as DSGE (in particular, the model might not be stochastic) as well as DSGE with overlapping generations (contrary to those with infinitely lived agents). ...
  • 862
1 vote

Why in maximization in OLG model with 1 generations we assume that both consumptions are positive?

I think all the textbook is trying to say is that there can be no corner solutions to your maximization problem. Not refusing consumption in any period, I think translates to consumption in each ...
  • 721
1 vote

Perpetual Youth Model

I haven't read the paper in full detail (I should, it's interesting) but let me give you my interpretation of the paper's title. Blanchard uses a constant probability of instanteneous death for each ...
  • 2,350
1 vote
Accepted

Interest/Rental Rate is today's or tomorrow's MPK?

I found the problem, and now I feel dumb but I suppose I should leave the question up so people can know the potential pitfall and prepare for it better than I did. The problem arose from me ...

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