"Lec 12 - Overlapping Generations Models of the Economy" Financial Theory (ECON 251) In order for Social Security to work, people have to believe there's some possibility that the world will last forever, so that each old generation will have a young generation to support it. The overlapping generations model, invented by Allais and Samuelson but here augmented with land, represents such a situation. Financial equilibrium can again be reduced to general equilibrium. At first glance it would seem that the model requires a solution of an infinite number of supply equals demand equations, one for each time period. But by assuming stationarity, the whole analysis can be reduced to one equation. In this mathematical framework we reach an even more precise and subtle understanding of Social Security and the real rate of interest. We find that Social Security likely increases the real rate of interest. The presence of land, an infinitely lived asset that pays a perpetual dividend, forces the real rate of interest to be positive, exposing the flaw in Samuelson's contention that Social Security is a giant, yet beneficial, Ponzi scheme where each generation can win by perpetually deferring a growing cost. 00:00 - Chapter 1. Introduction to the Overlapping Generation Model 12:59 - Chapter 2. Financial and General Equilibrium in Social Security 26:37 - Chapter 3. Present Value Analysis of Social Security 59:24 - Chapter 4. Real Rate of Interest and Social Security Complete course materials are available at the Open Yale Courses website: http://open.yale.edu/courses This course was recorded in Fall 2009.
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Tags: Lec 12 - Overlapping Generations Models of the Economy
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Lec 2- Utilities, Endowments, and Equilibrium
Lec 4- Efficiency, Assets, and Time
Lec 5- Present Value Prices and the Real Rate of Interest
Lec 6 - Irving Fisher's Impatience Theory of Interest
Lec 7 - Shakespeare's Merchant of Venice and Collateral, Present Value and the Vocabulary of Finance
Lec 8 - How a Long-Lived Institution Figures an Annual Budget. Yield
Lec 10 - Dynamic Present Value
Lec 13 - Demography and Asset Pricing: Will the Stock Market Decline when the Baby Boomers Retire?
Lec 14 - Quantifying Uncertainty and Risk
Lec 15 - Uncertainty and the Rational Expectations Hypothesis
Lec 16 - Backward Induction and Optimal Stopping Times
Lec 17 - Callable Bonds and the Mortgage Prepayment Option
Lec 18 - Modeling Mortgage Prepayments and Valuing Mortgages
Lec 19 - History of the Mortgage Market: A Personal Narrative
Lec 21 - Dynamic Hedging and Average Life
Lec 22 - Risk Aversion and the Capital Asset Pricing Theorem
Lec 23 - The Mutual Fund Theorem and Covariance Pricing Theorems
Lec 24 - Risk, Return, and Social Security
Lec 25 - The Leverage Cycle and the Subprime Mortgage Crisis