Overlapping Generations Model Of Money (OLG Model)

Overlapping Generations Model Of Money (OLG)

In this article we give you information about overlapping generations model of money (OLG model). This model has been proposed as an alternative to the MIUF (Money in the utility function) and MIPF (money in the production function) models. Since there are now two competing sets of models, we need to establish the criteria for selecting between them. Given the mandate of economics as a science to explain real-world observations, this selection should be based on the degree to which the competing models explain the stylized empirical findings on money in the modern economy.

OLG Model In Economy - Paul A. Samuelson (1958)
OLG Model In Economy

Overlapping generations model of money (OLG model) is used to explain holdings of money by an individual and the economy have been one-period (timeless) ones. We separate the individual’s lifetime into two (or more) “lifestages,” with two (or more) generations alive in the economy simultaneously and with trading between the generations. Such models are called overlapping generations models.

The concept of overlapping generations for the analysis of money in the economy was introduced by Samuelson. (1958) Then with major extensions by Wallace (1980, 1981) and
Sargent. (1987) And among others: Champ and Freeman (1994) present a textbook application of this approach.

Samuelson Aproach To The OLG Model In Economy

Overlapping Generations Model Of Money
Overlapping Generations Model Of Money

By the way, Samuelson presented a three-period (along with a simplified two-period) version of the overlapping generations model of money (OLG model). In this version, he focused on the rate of interest. In the three period model, individuals worked and earned income in the first two periods. And then individuals were retired in the third period. His problem was to allow positive consumption in the third period, when there was zero income and the commodities could not be stored over time. Samuelson showed how the economy could achieve this pattern of consumption through the social contrivance of fiat money, with the latter bringing about a “biological rate of interest” equal to the population growth rate.

Standart Version Of OLG Model In Economy

The standard version of the OLG model assumes that the individuals in the economy live for two periods only. (Or for two lifestages, “young” and “old,” with each lifestage lasting one period.) And also that in each period the economy has two generations of individuals. One of these is the old generation of individuals who were born in the preceding period. The other is the young generation born at the beginning of the current period. The old of one generation and the young of the next one overlap in every period. Because of that the name given to the models using this framework is overlapping generations models.

The OLG framework is a substitute for a timeless or an infinite one, with the representative agent having an infinite horizon. It does not by itself provide a model, but has to be
combined with other assumptions. This combination have to be done in order to yield a meaningful model. Today we tried to give you information about  overlapping generations model of money. If you  intrested in demand for money approaches. You can find detailed information in the article which is titled 3 Different Approach To The Demand For Money By the way if you want to learn more information about the topic you can watch this video from Youtube. See you soon in another content.

About the Author: rakunpelikanoglu

You might like

Leave a Reply

Your email address will not be published. Required fields are marked *