Endogenous Fluctuations and Social Welfare under Credit Constraints and Heterogeneous Beliefs

Maurizio Motolese, Hiroyuki Nakata

Research output: Working paper

Abstract

This paper examines the relationship between the aggregate output level and social welfare in an overlapping generations (OLG) model of a financial economy with heterogeneous beliefs by focusing on the case of rational beliefs in the sense of Kurz (1994). The aggregate output level is affected by the endogenously determined net supply of the riskless asset, which in turn is affected by the distribution of beliefs; thus, there is a coordination issue. To measure the social welfare, we adopt a measure that is based on the ex post social welfare concept in the sense of Hammond (1981), instead of the standard ex ante criterion to reflect the heterogeneous beliefs. Simulation results indicate that there may be an inverse relationship between the aggregate output and the social welfare. The results suggest that commonly used macroeconomic variables such as gross domestic product (GDP) may not be a very appropriate measure when making policy recommendations.
Original languageEnglish
PublisherThe Research Institute of Economy, Trade and Industry (RIETI)
Number of pages29
Publication statusPublished - 2016

Keywords

  • Credit constraints, Heterogeneous beliefs, Rational belief, Social welfare

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