This paper provides an analysis of the local dynamics implied by the perfectly flexible wage 2-period OLG model proposed in Hahn - Solow (1995). Specifically, by distinguishing between the consumption choices arising from a Cobb-Douglas and a CES utility function, we discuss the conditions for existence and uniqueness of the stationary solution. Thereafter, by reducing the underlying dynamics to adjustments of the real interest rate, we discuss the conditions for local stability. Moreover, for each case, we show that this model may display a stable «barter version» in which the financial assets issued by firms are not «barren» assets.
Local Dynamics Under Perfectly Flexible Wages
GUERRAZZI, MARCO
2007-01-01
Abstract
This paper provides an analysis of the local dynamics implied by the perfectly flexible wage 2-period OLG model proposed in Hahn - Solow (1995). Specifically, by distinguishing between the consumption choices arising from a Cobb-Douglas and a CES utility function, we discuss the conditions for existence and uniqueness of the stationary solution. Thereafter, by reducing the underlying dynamics to adjustments of the real interest rate, we discuss the conditions for local stability. Moreover, for each case, we show that this model may display a stable «barter version» in which the financial assets issued by firms are not «barren» assets.
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