Universidad del Rosario - Facultad de Economia

Advanced Macroeconomics - Problem set #1

Problem set # 1

1. Suppose, as in Diamonds model that Lt two-period-lived individuals re

born in period t and that Lt = (1 + n)Lt1 . For simplicity, let utility be
logarithmic with no discounting: Ut = ln(C1t ) + ln(C2t ).The production
side of the economy is simpler than in Diamond model. Each individual
born at time t is endowed with A units of the economys single good.
The good can be either consumed or stored. Each unit stores yields > 0
units of the good in the following period. Finally assume that in the initial
period 0, in addition to the Lo young individuals each endowed with A
1
units of the good , there are 1+n Lo individuals who are alive only in period
0. Each of these Old individuals is endowed with some amount of Zof
the good; Their utility is simply their consumption in the initial period ,
C20 .
a) Describe the decentralized equilibrium of this economy. (Hint: given the
overlapping-generations structure, will the members of any generation en-
gage in transactions with members of another generation?)
b) Consider paths where the fractions of agents endowments that is stored,
, is constant over time. What is total consumption ( that is, consumption
of all the young plus consumption of all the old) per person on such a path
as a function of f ? if , what value of satisfying maximizes consumption
per person? is the decentralized equilibrium Pareto efficient in this case?
if not, how can a social planner raise welfare?
2. There are two ways in which the Diamond and Samuelson model differs
from textbook models. First, markets are incomplete: because individuals
cannot trade with individuals who have not been born, some possible
transactions are ruled out. Second, because time goes on forever, there
are an infinite number of agents. This problem asks you to investigate
which of these is the source of the possibility of dynamic efficiency. for
simplicity , it focuses on the Samuelson overlapping generations model
again with log utility and no discounting. To simplify further, it assumes
n=0 and 0 < < 1.
a) Suppose we eliminate incomplete markets from the model by allowing all
agents to trade in a competitive market before the beginning of time.
That is a Walrasian auctioneer calls out prices Q0, Q1 , Q2 ... for the good at
each date. Individuals can then make sales and purchases at these prices
given their endowments and their ability to store. The budget constraint
of an individual born at t is thus :

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 Qt C1t + Qt+1 C2t+1 = Qt (A St ) + Qt+1 St

Where St (which must satisfy 0 St At ) is the amount the individual

stores.

i) Suppose the auctioneer announces Qt+1 = Qt for all t > 0.Show that
in this case individuals are indifferent concerning how much store , that
there is a set of storage decisions such that markets clear at every date,
and that this equilibrium is the same as the equilibrium described in part
(a) of problem 1 .

ii) Suppose the auctioneer announces that fail yo satisfy Qt+1 = Qt at some
date. Show that at the first date that does not satisfy this condition the
market for the good cannot clear , and thus that the proposed price path
cannot be an equilibrium.

b) Suppose that the economy ends at some date T. That is, suppose the indi-
viduals born at T live only one period ( and hence seek to maximize C1t ),
and that thereafter no individuals are born. Show that the decentralized
equilibrium is Pareto-efficient.

c) In light of these answers, is it incomplete markets or infinite duration that

is the source of dynamic inefficiency?
3. Consider an overlapping generations economy with pure exchange , where
each consumer have the following utility function and endowments:
U (cyt , cot+1 ) = (cyt )1/2 + (cot+1 )1/2
w = (wy , wo ) = (2, 1)
a. Define and resolve the equilibrium of the economy ( Consumption, Prices).
b. Is there exchange between generations?

4. A small open economy is inhabited by two-period lived individuals who

receive an exogenous endowment, yt , in the period when they are born and
receive no further endowment in the second period of life. Population is
constant. Individuals have access to a world capital market with interest
rate r. The individuals utility function is :

c1R
1 1 c1R
2,t+1
U= +
1 R (1 + ) 1 R

a. Derive the individuals consumption function, and show how first-period

consumption is related to the interest rate.

b. Calculate the current account of the balance of payments ( assume that

there is only one person per generation for convenience) as a function of
yt and other variables.

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c. Suppose there is a temporary reduction in yt , from y to y . In the
next period y is back at yt . Show how the current account is affected in
period t and subsequently.
Now suppose that the decline in endowment is permanent . Show how the
current account adjusts.
5. Assume a Cobb-Douglas production function , with share of labor , and
the simplest two-period-lived overlapping generations model. The popu-
lation growths at rate n. Individuals supply inestically one unit of labor
in the first period of their lives and have logarithmic utility over consump-
tion:
1
U = lnc1t + lnc2,t+1 (1)
1+
a. Solve for the steady state capital stock.

b. Show how the introduction of pay-as-you-go social security, in which the

government collects amount d from each young person and gives (1 + n)d
to each old person, affects the steady state capital stock.

Parcial 2016-I Macroeconoma Avanzada

Transferencias Intergeneracionales
1. Considere la siguiente economa donde un agente vive por dos genera-
ciones. Sus preferencias estn determinadas por la siguiente funcin de
utilidad:

U (ct , ct+1 ) = ln ct + ct+1 (2)

Donde 0 < < 1. c es el consumo del agente. El agente solo recibe una
dotacin w en el primer priodo. En el segundo solo se consume lo que
logra ahorrar del primer priodo.
(a) Plantear y explicar el problema de optimizacin de esta economa
especificando la restriccin presupuestaria intertemporal.
(b) Encontrar las asignaciones ptimas de consumo y ahorro.
(c) Suponga que existe una transferencia intergeneracional de los jvenes
a los viejos denotadas por , la cual es proporcional al ingreso del
primer priodo. Plantear la nueva restriccin presupuestaria y encon-
trar las asignaciones de consumo de jvenes y viejos bajo el esquema
de transferencia intergeneracional. Compare y analice los resultados
con el punto anterior y concluya.

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(d) Encontrar el nivel de transferencia ptimo, es decir el que maximiza
el bienestar social, explique la intuicin y grafique (eje Y, Bienestar
social, eje X transferencia intergeneracional). Nota: El bienestar
social puede ser calculado como la funcin valor del problema.