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.
Targets, history, excess sensitivity, static expectations, rational expectations, uniqueness.
GUHA, Ashok S. and GUHA, Brishti.
Target Saving in an Overlapping Generations Model. (2008). 26. Research Collection School Of Economics.
Available at: http://ink.library.smu.edu.sg/soe_research/1081
Creative Commons License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.