Existence and Calculation of Optimal Monetary Equilibria on Overlapping Generations Economies

Abstract

A well-known feature of overlapping generations economies is that the First Welfare Theorem fails and equilibrium may be inefficient. The Cass (1972) criterion furnishes a necessary and sufficient condition for efficiency, but it does not address the existence of efficient equilibria, and Cass, Okuno, and Zilcha (1979) provide nonexistence examples. A closely related question (known as the Hahn (1965) problem) deals with the existence of monetary equilibria. In this paper, I provide sufficient conditions for the existence of optimal monetary equilibria on consumption-loan, non-stationary overlapping generations economies without durable, dividend-paying assets, cash-in-advance constraints, wealth-transfer mechanisms, or transaction costs. Essentially, the economy must be prone to savings. Furthermore, I develop an algorithm to find these optimal monetary equilibria as the limit of nested compact sets. These compact sets are the result of a backward calculation through equilibrium equations departing from the set of optimal monetary equilibria of well-behaved tail economies.