Thanks for clear and step-by-step explanation. Could you help to explain how to modify equation above using assumption that young generation has credit constraint and myopic forecast limitation? Thanks so much
To get a credit constraint, you need to make several modifications. The easiest model would probably be adding an asset At that is freely tradable and to have a stochastic endowment in both periods. This way, agents with low endowment will borrow in the first period and aim to pay back in the second. Then you can impose that agents can only borrow up to a certain point (e.g. At>=0). This should lead to precautionary savings. With myopic forecasts, agents will optimize based on a specific future expectation (e.g. save the same, more or less). You can calculate this optimal value and then check what consequences different scenarios have for an individual or the aggregate.
Hi Constantin, this is a great video. I have a concern. If Kt + 1 = It + (1-d) Kt, where d is depreciation equal to 0 and we are in a closed economy. So I can rewrite it as Kt + 1 = St. Nt + Kt. Now, if the St. Nt is a function of capital accumulation, how do I show that excess in another market? Can I assume they didn't save and that St. Nt is 0 or do I have to do something with that Kt? Being the equilibrium of the labor market: Lt.(offer). Nyt = Lt Equilibrium of capital market: Kt+1 = Nt. St Equilibrium of the good markets: F(Kt, Nt) = Cot.Not + Cyt.Nyt How can I re express those equilibriums having this Kt extra? Hope you can help me with this. Thanks.
I could think of two reasons, why there might be a W2. Either the assumption is that agents can work when they are old as well (or get an endowment), or W2 refers to the wages of the second generation when they are young. In either case, it would show up in the solution. In the simplest version however, agents live off their savings when they are old and there is unlikely to be a W2.
This video solves the continuous time model, which is very similar to the RCK model (except that labor is assumed constant). th-cam.com/video/8z9AWA_MjVU/w-d-xo.html I do not go over the phase diagram in that video, but my general video on systems of differential equations should point you in the right direction. Please let me know if you have further questions!
I do not follow a specific book. The Romer (Advanced Macro) is good or the notes under www.uam.es/personal_pdi/economicas/mjansen/teaching/dynamicmacroenglish/lecture7_en_2012.pdf are good as well. But there are also many other books and sources available.
Excellent, thank you. I have been making it through my first year because of graduate macro because of your videos.
Thanks for clear and step-by-step explanation. Could you help to explain how to modify equation above using assumption that young generation has credit constraint and myopic forecast limitation? Thanks so much
To get a credit constraint, you need to make several modifications. The easiest model would probably be adding an asset At that is freely tradable and to have a stochastic endowment in both periods. This way, agents with low endowment will borrow in the first period and aim to pay back in the second. Then you can impose that agents can only borrow up to a certain point (e.g. At>=0). This should lead to precautionary savings.
With myopic forecasts, agents will optimize based on a specific future expectation (e.g. save the same, more or less). You can calculate this optimal value and then check what consequences different scenarios have for an individual or the aggregate.
You explain things really well
Thanks a lot, btw if you can give a brief introduction to the background and motivation of OLG model, that will be perfect.
thank you for this clear explanation
Great video
Hi Constantin, this is a great video. I have a concern. If Kt + 1 = It + (1-d) Kt, where d is depreciation equal to 0 and we are in a closed economy. So I can rewrite it as Kt + 1 = St. Nt + Kt. Now, if the St. Nt is a function of capital accumulation, how do I show that excess in another market? Can I assume they didn't save and that St. Nt is 0 or do I have to do something with that Kt?
Being the equilibrium of the labor market: Lt.(offer). Nyt = Lt
Equilibrium of capital market: Kt+1 = Nt. St
Equilibrium of the good markets: F(Kt, Nt) = Cot.Not + Cyt.Nyt
How can I re express those equilibriums having this Kt extra?
Hope you can help me with this.
Thanks.
Why sometimes I see W2 income in solutions in some other problems. Is it a different model or question assumption?
I could think of two reasons, why there might be a W2. Either the assumption is that agents can work when they are old as well (or get an endowment), or W2 refers to the wages of the second generation when they are young. In either case, it would show up in the solution. In the simplest version however, agents live off their savings when they are old and there is unlikely to be a W2.
awesome
Hello Sir, can you also please do a video on Ramsey-Cass-Koopmans Model. Thank you very much in advance!
This video solves the continuous time model, which is very similar to the RCK model (except that labor is assumed constant). th-cam.com/video/8z9AWA_MjVU/w-d-xo.html I do not go over the phase diagram in that video, but my general video on systems of differential equations should point you in the right direction. Please let me know if you have further questions!
Sir thank you very much!
Where does Ct+1 come from? Savings has nothing to with depreciation. What is meant by S is actually real (!) Investment I. And that is not the case.
Which book you follow?
I do not follow a specific book. The Romer (Advanced Macro) is good or the notes under www.uam.es/personal_pdi/economicas/mjansen/teaching/dynamicmacroenglish/lecture7_en_2012.pdf are good as well. But there are also many other books and sources available.
Thanks ,
Nonsense. They don’t work any more in t+1? My oh my, what a nonsense.