The overlapping generations (OG) model has been an important model for examining macroeconomic issues in recent decades because it has a microeconomic foundation because it can distinguish generational impacts and because it is dynamic (meaning time plays an essential role in the model). My work is the extension of Diamond (1965) and Tirole (1985) models. The Diamond (1965) and Tirole (1985) models extend the Samuelson (1958) overlapping generations model by respectively adding production and production with bubbles.  We identify an accounting anomaly in the Diamond-Tirole framework.  To reconcile the accounting properly, we find that the interest rate paid on saving cannot be the same as the marginal product of capital as has been assumed.   We examine the implications of this finding for interest rate theory. 

 

The second extension we have worked on relates to the fact that for particular parameterizations bubbles can arise in an OG economy, and enhance efficiency. Weil (1987) is an important OG paper, for Weil showed how the existence of bubbles relates to the confidence the population has that the bubble will NOT burst.  In the Weil paper, confidence is exogenous.  What we will seek to do is endogenize the level on confidence by introducing a learning process.  People develop an estimate that the bubble will persist from one period to the next using a learning process.  The most simple learning process will likely be reinforcement learning.  The primary alternative is belief learning.  Experience Weighted Average learning is a combination of the two.  We hope to characterize the path the economy will follow as it depends upon how people learn.