Money and market incompleteness in overlapping generations models

doi:10.1016/0304-3932(89)90017-2

Journal of Monetary Economics

Volume 24, Issue 1, July 1989, Pages 69-91

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Abstract

This paper investigates the extent to which the character of equilibria in stochastic overlapping generations models stems from the model's generic market incompleteness. In addition, it addreses the question of whether money serves to complete markets in these models. We show that money does not complete markets in the sense of expanding the set of state-contingent commodities that an individual may trade. The introduction of money effects state-contingent transfers of wealth between individuals; this is a generalization of a result obtained by Marshall, Sonstelie, and Gilles (1987). Numerical simulation of the model suggests that the risk-sharing induced in the monetary economy leads to substantial increases in welfare levels relative to the nonmonetary economy.

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There are more references available in the full text version of this article.

Cited by (5)

Intergenerational risksharing and equilibrium asset prices
2007, Journal of Monetary Economics
In the presence of overlapping generations, a social security system, with contingent taxes and benefits, can affect both asset prices and intergenerational risksharing. In a simple model with two risky factors of production—human capital, owned by the young, and physical capital, owned by all older generations—a social security system that optimally shares risks exposes future generations to a share of the risk in physical capital. Such a system reduces precautionary saving and increases the riskbearing capacity of the economy. Under plausible conditions it increases the riskless interest rate, and lowers the price and risk premium of physical capital.
On the quantitative importance of market completeness
1994, Journal of Monetary Economics
This paper quantitatively compares allocations in calibrated large overlapping generations growth models that only differ in their market structures for insuring against aggregate risk. The findings are that the equilibrium behavior of aggregate variables is very similar across all market structures. There are only minor differences: the ratio of the volatility of aggregate consumption relative to that of investment is higher in complete market economies, due partly to the higher volatility of consumption of older people. It was also found that the risk premia in complete markets economies is basically zero. Therefore, we can conclude that we can for the most part abstract from the issue of whether there exist markets for aggregate risk.
Money, competitive efficiency, and intergenerational transactions
1993, Journal of Monetary Economics
This paper shows that a three-period overlapping-generations model with an inverse-V life-cycle endowment structure can generally restore the first welfare theorem without imposing price-characterization conditions. Even when Walras's law fails, a Walrasian equilibrium may be optimal in a three-period model, depending on the endowment and generational structure. If middle-aged generations have sufficiently high income so that both the old and the young are net borrowers, transactions are generation-by-generation bilaterally balanced, thus ruling out potentially better but unenforceable contracts in equilibrium and ensuring competitive efficiency. When there are imbalances, fiat money, which serves as a medium of intergenerational exchanges, becomes valuable.
Chapter 35 Overlapping generations
1991, Handbook of Mathematical Economics
Competitive equilibria in economies of overlapping generations are different from competitive equilibria in economies that have extended over finitely many periods, finite economies for short. These differences concern the properties of competitive equilibria, such as existence, optimality and determinacy or local uniqueness; and the phenomena compatible with competitive equilibria, such as net aggregate debt or fiat money with a positive price. The chapter discusses that all the variants of the model of overlapping generations allow for infinity of time periods and hence for infinitely many commodities. This infinity of time periods and commodities is not a mathematical curiosity, but rather is central to the economic significance of the model. Consider a pay-as-you-go system of social security. In economic models in which the rationality of individuals is presumed to be unlimited, the fact that no new generation would appear at some point in the very distant future would also lead to the immediate break down of the social security system. In an economy of overlapping generations, the temporal and demographic structure is explicit, which evidently enriches the study of problems such as the transfer of value over time. It also allows the claim that the inability of individuals to trade directly with individuals whose consumption and endowment spans commence after they have perished is the distinguishing feature of economies of overlapping generations.
Life-Cycle Economies and Aggregate Fluctuations
1996, Review of Economic Studies

^∗: I have benefited from discussions with Thomas Cooley, Gregory Huffman, Takao Kataoka, Robert King, Charles Plosser, Ping Wang, and an anonymous referee, but they should not be held responsible for any remaining errors. NSF's support under grant SES-8606758 is gratefully acknowledged.

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Money and market incompleteness in overlapping generations models

Abstract

Journal of Economic Theory

Journal of Economic Theory

Evaluating overlapping generations models

Approximating suboptimal dynamic equilibria: An Euler equation approach

Equilibrium asset prices under non-neutral taxation