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)| false Fougère, M., and M. Mérette, 2000, “ Population Aging, Intergenerational Equity, and Growth: Analysis with an Endogenous Growth Overlapping Generations Model,” in Using Dynamic General Equilibrium Models for Policy Analysis, ed.by ( G. W. Harrison, S. E. H. Jensen, L. H. Pedersen, and T. F. Rutherford Amsterdam: North-Holland).
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We thank, without implication, Eduard Brau, Oleh Havrylyshyn, Paul Ross, and Harry Trines for helpful comments and suggestions. Jensen: CEBR and University of Copenhagen; Rasmussen: Treasurer’s Department, IMF; Rutherford: University of Colorado and CEBR.
This may not generally be the case, however. For example, Keane and Prasad (2002) report evidence that while inequality in labor earnings rose markedly and consistently during 1990–97, income and consumption inequality declined in 1990–92 and rose only moderately above pre-transition levels by 1997.
This issue is related to the discussion of the determinants of the magnitude of the effects of trade liberalization. A standard model with constant returns to scale predicts effects that are much smaller than is generally thought to be the case. Consequently, several authors, including Rutherford and Tarr (2002), have proposed models for evaluating the effects of trade liberalization that operate with increasing returns to scale.
To put perspective on the implications of our formulation of household behavior we also present results arising when consumption is represented by an infinitely-lived representative agent. This would be equivalent to a situation where each generation in its utility function weights the consumption of subsequent generations in the same way as its own consumption. In this case all generations would benefit equally from the long-run increase in productivity associated with the transition process.
Markusen, Rutherford, and Tarr (2001) consider the effects of knowledge imports by presenting a model of expanding product varieties with both domestic and foreign varieties of intermediates.
Throughout the paper, we express all prices in present value prices relative to time t = 0 and use bars to indicate quantity levels in the baseline.
This assumes that an equilibrium always involves positive investment levels, which is the case for all the simulations under consideration. Corner solutions, in which (9) is replaced by an inequality exhibiting complementary slackness with
The model exhibits the same feature if we include exogenous growth in Lt. In that case gN =g, as here, but the model would also involve several other (exogenous) steady-state growth rates. To keep the analysis transparent, we keep Lt constant and focus on the engine of growth: effective increases in entrepreneurial capacity.
In addition, we consider among others the case of an open economy with perfect international capital markets. In this situation the domestic interest rate is exogenous, which would tie down the steady-state growth rate also in the standard model.
To provide a consistent basis for the small open economy assumption we implicitly assume that the growth rate abroad also is equal to g so that the relative size of the domestic economy does not trend. The fact that the present model has g as the exogenous long-run growth rate is therefore appealing as a change in the steady-state growth rate would ultimately become inconsistent with the small open economy assumption.
Consistency could also be achieved by setting ρ exogenously and calibrating either g or r. We choose to calibrate ρ as we view this parameter as the most uncertain. The resulting value of ρ is in any case similar to the value of 0.004 used in Altig et al. (2001) where this parameter is set exogenously.
The calibrated consumption growth path is somewhat steep through the lifecycle. A more realistic consumption profile could be obtained by imposing a more probable hump-shaped profile for effective labor endowments, as it is done in, e.g., Auerbach and Kotlikoff (1987). We abstain from doing so to maintain simplicity.
This assumption is important as it determines how different age groups are exposed to capital gains and losses resulting from changing asset prices due to an unanticipated policy change.
In this data, Latvia is an exception in that the age profile of wages in new enterprises is not significantly different from that in the rest of the economy, although average salaries in new enterprises are higher also in this country.
Friedberg (2002) finds such an effect in acquisition of computer skills in the U.S. where evidence suggests that computer use is associated with a lower probability of retirement.
With the Cobb Douglas technology in (8), the case where all generations benefit so
An extreme example of such a trade restriction would be to allow no trade whatsoever, in which case the model would simply be one of a closed economy.
For the initial population the reported welfare changes relate to remaining life time utility.
To evaluate the significance of the OLG demand system, it is useful to compare these results to those arising with an Ramsey-type characterization of household demand. Assuming a single infinitely-lived agent with an utility discount rate equal to (1 +r)/(1+g)θ -1 and otherwise maintaining the above parameterization produces the same baseline equilibrium. Here a 10 percent increase in this agents endowment of entrepreneurial skills results in an equivalent variation of 3.8 percent.
In this case, the Ramsey-type characterization of household demand results in an equivalent variation of 3.2 percent.
The specific formula used to allocate asset holdings is here given by μa =