Overlapping generations models of monetary economies: Variations on a theme

It is contended in this thesis that close on the heels of the New Classical Revolution in macroeconomic theory, aided by tools fashioned by the revolutionaries, has come a Keynesian Restoration, under the unlikely auspices of Samuelson's Overlapping Generations Model (OLG). Despite an unconcern with effective demand problems--markets clear, in OLG models, just as in New Classical models--OLG provides a theoretical justification for an activist, fiscalist government policy directed at correcting the inter-temporal misallocation which typically obtains under laissez-faire in an OLG economy. The Keynesian thematic in OLG is argued for in detail. OLG entails: a long-run role for Liquidity Preference in the determination of real interest rates; a 'reverse Treasury view' on the relative merits of fiscal vs. monetary policy; an activist imperative stemming from the multiple equilibria, not all desirable, that an OLG economy will exhibit; and an analogue, in utility terms, for the Keynesian concept of an unemployment equilibrium. It is argued that the capital-theoretic implications of OLG ought to be seen as a broadening and deepening of Phelps' Golden Rule results. They are given depth by being embedded in a general equilibrium model where agents optimize. Breadth comes through the extension of the presumption in favor of intervention to under-capitalized economies, where the laissez-faire real rate of return exceeds the growth rate. It is contended that though such economies (called 'classical') are Pareto-efficient, they may aptly be characterized as tragic: Intervention can vastly improve matters at the cost of arbitrarily small damage to the initial old. These interesting welfare implications of intervention in a classical OLG economy are displayed in a model where fiat money is introduced in the form of nominal loans by the government. Such a monetized classical economy performs very differently from the monetized Samuelson economies which are standard in the literature. A spatial OLG economy is constructed and examined for the analogues to the inefficient non-stationary paths which are found in the standard temporal model. Finally, it is shown that OLG is capable of shedding light on older issues in monetary thought. Marx's work on commodity money and fetishism, as well as Mill's qualified defense of the Real Bills doctrine, are analyzed using OLG.