My reading list on the overlapping generations model has already generated some questions. Rather than respond in the comment section to each question individually, I will answer these questions in a new post. Here goes.
In a comment on my previous blog Brian Romanchuck has a “good grounding in mathematics” and he “understands the [overlapping generations] models.” He is my ideal reader. Brian raises a number of points that may be shared by others with a similar background. If you also have a good grounding in mathematics and you think you understand the models: this post is for you.
I applaud everyone who has weighed in on the Great Blog debate about debt (Simon, Bob, me, and others too numerous to link. All of the issues that have been raised on Nick's blog were the topic of frontier research in economics journals in the 1950s -- 1970s. Nick has links to earlier posts here.
The paper that started all of this (at least in the English speaking world) was by Paul Samuelson. "An exact consumption-loan model of interest with or without the social contrivance of money", Journal of Political Economy 1958, Vol 66 No. 6. The French lay claim to an earlier version by Maurice Allais, but that's another story.
Samuelson's paper was a revelation to economists because it provided an example where markets don't work. In Samuelson's example, there is an equilibrium, (people optimize taking prices as given and all markets clear) that can be improved upon by a government institution. Samuelson's paper is a good starting point for those who would like to read more about this.
In a recent post on the (non)-importance of debt buildup worldwide, Antonio Fatas makes the point that debt is not necessarily a problem. While I agree with that statement: a great deal hinges on the qualification “not necessarily”.
Paul Krugman goes further than Antonio. According to Paul debt is “money that we owe to ourselves”. That is at best misleading and at worst; false. Money is money we owe to ourselves. Debt is money that some of us owe to others.
A long time ago, in a galaxy far far away, there were two planets orbiting a star, not unlike our own sun. The inhabitants of these planets share a common ancestry but, over the years, they have developed somewhat different temperaments.
The names of these planets are difficult to pronounce in English, but we will call them Nordus and Sudus. The name of their star is Sol.
Nordus, being further away from Sol, has a colder climate than Sudus and its inhabitants are known to be frugal and patient. The Sudusians, in contrast, live for the moment. Using the language of economics, earth people would say that the Sudusians have a higher rate of time preference.
