Expectations, (in)stability and (in)viability in realistic overlapping cohorts models

✍ Scribed by György Molnár; András Simonovits

• Publisher: Elsevier Science
• Year: 1998
• Tongue: English
• Weight: 222 KB
• Volume: 23
• Category: Article
• ISSN: 0165-1889
• DOI: 10.1016/s0165-1889(97)00121-8

✦ Synopsis

In this paper we shall consider the multi-cohort generalization of overlapping generations models, namely overlapping cohorts (OLC) models. Each time-period consumers of different ages form expectations on future interest rates and conditionally maximize utility arising from their remaining consumption paths under the condition of zero bequest. For every time period a coordinator determines the new interest rate to ensure that the total consumption is equal to the total endowment of the society. The message of the paper is the following: (1) In OLC, the dynamics generated by rational expectations is frequently not only unstable but unviable. (2) In OLC, the dynamics generated by naive expectations is practically asymptotically stable and viable around the lower steady state.