Economic Growth and Business Cycles in a Two-Sector Overlapping-Generations Model

The overlapping-generations (OLG) model has gained more and more acceptance in recent years. It has been used in theoretical as well as in applied work to study pressing economic issues such as the reform of the public social security systems. Particularly popular is the one-sector OLG model with production which imposes the assumption of a single production unit and an homogeneous all-purpose good. This assures mathematical tractability but comes at the cost that many well-known economic phenomena are not observable in the model. The usually imposed assumptions exclude endogenous economic growth and business cycle fluctuations from the outset. The present monograph extends the standard framework by allowing for two different commodities: a consumption good for consumption needs and a capital/investment good to transfer wealth into the future. The analysis shows how to cope with the mathematical complexities involved and establishes that even for popular standard examples of production technologies and preferences endogenous economic growth and complex growth patterns may arise. It considers different types of forecasting behavior and their effect on economic growth and development. The two-sector OLG framework may improve the common economic understanding of a number of economic issues. As an example, this work applies the framework to discuss the so-called “asset-market meltdown hypothesis” frequently posed in recent years. The central issue is the future impact of the baby-boom generation of the 1950s and 1960s on asset markets.