A Theory of Economic Growth: Dynamics and Policy in Overlapping Generations

Provides an in-depth treatment of the overlapping generations model in economics incorporating production. Chapter 1 investigates competitive equilibria and corresponding dynamics: existence and uniqueness of equilibrium, global dynamics of capital (including poverty traps), and various extensions of the model. Chapter 2 analyzes the optimality of allocations in this framework, using both the value function and marginal approaches. Optimality with unbounded growth is also analyzed. Policy issues including the Second Welfare Theorem, pensions, government spending, and optimal taxation, are discussed in chapter 3. The notion of public debt is introduced in chapter 4 and the sustainability of policies with budget deficits/surpluses is examined. The last chapter presents extensions of the model including altruism, education/human capital, and habit formation. Methodological emphasis is put on using general preferences and technologies, on the global study of dynamic aspects of the model, and on furnishing adequate tools to analyze policies involving inter-generational transfers.

• A most rigourous analysis on the theory of economic growth using overlapping generations model • Authors are respectively well-respected ‘young Turk’ and senior professor in Western European economics • Balances theory and policy, provides explicit benchmarks on determinants of growth, intergenerational transfers

Introduction; Acknowledgements; Part I. Competitive Equilibria: 1. The model; 2. Main assumptions; 3. The behavior of the agents at period t; 4. The temporary equilibrium; 5. The inter-temporal equilibrium with perfect foresight; 6. Capital dynamics at a rational inter-temporal equilibrium; 7. Comparison of myopic and perfect foresight; 8. Applications and extensions; 9. Conclusion; Part II. Optimality: 10. Optimality of stationary paths; 11. Optimality of the dynamics; 12. The planning problem; 13. Marginal analysis of optimal solutions; 14. Unbounded optimal growth; 15. Applications and extensions; 16. Conclusion; Part III. Policy: 17. Lump-sum transfers and the second welfare theorem; 18. Pensions; 19. Public spending; 20. Study of the second-best problem; 21. Applications and extensions; 22. Conclusion; Part IV. Debt: 23. Diamond’s model with debt; 24. The inter-temporal budget constraint of the government; 25. Constant deficit policies; 26. Constant debt policies; 27. Applications and extensions; 28. Conclusion; Part V. Further Issues: 29. Dynastic altruism; 30. Human capital and education; 31. Inter-generational externalities; 32. Macro-economics and general equilibrium; Technical appendices; List of definitions; List of propositions; List of assumptions; Bibliography; Author index; Subject index.

‘A comprehensive, up-to-date primer on the dynamics of growth theory and fiscal policy, written by two recognized experts in the field. For graduate students, researchers and policy-makers, this book illustrates how to harness solid economic theory in the service of cutting-edge debates about education, social security reform, and public debt management.’ Costas Azariadis, University of California, Los Angeles

‘The overlapping generations model and the infinitely lived or dynastic model are the two workhorses of modern macroeconomics. De La Croix and Michel have written a wonderfully accessible graduate textbook on the overlapping generations model. They carefully take students through essentially every variant of the model, prove a large number of known results, and offer a few new ones as well. This book is an essential addition as a teaching tool and an invaluable reference on every economist’s shelf.’ V. V. Chari, University of Minnesota

‘In recent decades overlapping generation models have become a central framework of analysis in the research of economic growth. The authors present a comprehensive and lucid exposition of the dynamic structure of the basic overlapping generation features with production. Highly recommended for researchers and graduate students in the fields of growth theory and dynamic macroeconomics.’ Oded Galor, Brown University

‘Some of the most hotly debated government policies are those that involve redistribution across generations, such as social security and public education. De la Croix and Michel provide a manual of economic tools for evaluating these sorts of policies based on simple overlapping generations models. Their presentation of these models strives to combine applicability for policy analysis with a solid foundation in dynamic general equilibrium theory. Their book should be of use to economists from the level of advanced undergraduate students to researchers and teachers.’ Timothy J. Kehoe, University of Minnesota and Federal Reserve Bank of Minneapolis

‘David de la Croix and Philippe Michel have written the definitive what\'s what study of economic growth and policy in the life-cycle growth model. Their book is a treasure for serious economists, both young and old.’ Laurence J. Kotlikoff, Boston University

‘The overlapping generations model is a cornerstone of contemporary economic theory. De la Croix and Michel provide the first comprehensive textbook devoted to the analysis of these models. The book will be of considerable use to economists studying demographical economics, intergenerational fiscal policies, or more generally any issue related to long-run growth.’ Gilles Saint-Paul, Université des Sciences Sociales de Toulouse

‘… an excellent introduction to an essential tool in economics …’ Journal of Economics