The Model

The overlapping generations growth model is a very general analytical framework from which one can launch a multitude of economic studies. In this chapter, we will establish how we will employ it throughout all our subsequent analyses. Perhaps, one of the model’s most important aspects is its economic time frame. Here, we apply a two-period lifecycle growth model. This model was originally proposed by Diamond (1965), and since that time has been employed by many researchers due to its well-suited generalization enabling many simplifications. In this chapter, the dynamic properties of the model are focused on as they are pivotal in investigating the effects of capital accumulation on each generation’s welfare during the ensuing transition and in the long run. Policy implications of the modified golden rule and golden rule are explained and, following this, the applicability of the basic framework is extended in scope by including an endogenous labor supply, bequests, and a multi-period setting.