Target Saving in an Overlapping Generations Model

• Main Authors: GUHA, Ashok S., GUHA, Brishti
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2008
• Subjects: Targets; history; excess sensitivity; static expectations; rational expectations; uniqueness.; Behavioral Economics; Macroeconomics
• Online Access: https://ink.library.smu.edu.sg/soe_research/1081; https://ink.library.smu.edu.sg/context/soe_research/article/2080/viewcontent/target.pdf
• Institution: Singapore Management University

We examine a model in which the utility function has been engineered so that it is optimal for consumers to aim for a fixed target level of retirement resources. In this case consumption displays excess sensitivity to current income as well as perfect old age insurance. In an overlapping generations model, this leads naturally to multiple and unstable equilibria. Under static expectations, it also leads to a well-defined dynamics, including possible historical traps, implosions involving ever-diminishing capital stock and ever-increasing interest rates, and the feasibility of optimal one-time interventions.