A closed model of overlapping cohorts

Abstract

Until now the interest rate has been taken as a constant and as exogenously given. This assumption is acceptable in a small open economy but is unacceptable in a large closed economy. We shall now study what happens if interest rates change endogenously over time. Samuelson (1958), Diamond (1965), Gale (1973, Part I), and, among others, Blanchard-Fischer (1989), Simonovits (2000a, Appendix B) have studied overlapping generations models, where only two generations interact in each period: the young and the old. The young generation is just born, the old is to die at the end of period. These elementary models yield elegant insights into the possible dynamics of pension systems (see Appendix B for details).