Perpetual youth and endogenous labour supply: a problem and a possible solution

Guido Ascari () and Neil Rankin ()

No 346, Working Paper Series from European Central Bank

Abstract: In the “perpetual youth” overlapping-generations model of Blanchard and Yaari, if leisure is a “normal” good then some agents will have negative labour supply. We suggest a solution to this problem by using a modified version of Greenwood, Hercowitz and Huffman’s utility function. The modification incorporates real money balances, so that the model may be used to analyse monetary as well as fiscal policy. In a Walrasian version of the economy, we show that increased government debt and increased government spending raise the interest rate and lower output, while an open-market operation to increase the money supply lowers the interest rate and raises output.

Keywords: Blanchard-Yaari overlapping generations; endogenous labour supply. (search for similar items in EconPapers)
JEL-codes: D91 E63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-mac
Date: 2004-04
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Journal Article: Perpetual youth and endogenous labor supply: A problem and a possible solution (2007)
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