Working Paper 325

Nonmonetary Steady States in Stationary Overlapping Generations Models With Long Lived Agents and Discounting: Multiplicity, Optimality, and Consumption Smoothing

S. Rao Aiyagari

Revised March 1, 1987

We construct a sequence of pure exchange, stationary OLG economies in which generations have longer and longer life spans and all agents maximize a discounted sum of utilities with a fixed, positive, and common discount rate. Period utility functions and endowment patterns are subject to mild restrictions and within generation heterogeneity is permitted. We show that: (i) Every sequence of equilibrium interest rates converges to the discount rate. (ii) Eventually every nonmonetary steady state is optimal and a monetary steady state will never exist. (iii) For any agent consumption at any fixed age converges to permanent income evaluated using the utility discount rate.

Published In: Journal of Economic Theory (Vol. 45, No. 1, June 1988, pp. 102-127)

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