Munich Personal RePEc Archive

How long does a generation last? Assessing the relationship between infinite and finite horizon dynamic models

Guerrazzi, Marco (2021): How long does a generation last? Assessing the relationship between infinite and finite horizon dynamic models.

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Abstract

This paper aims at assessing the temporal relationship that exists between the time reference of dynamic models with infinite and finite horizon. Specifically, comparing the optimal inter-temporal plans arising from an infinite-horizon model and a 2-period overlapping generations model in their stationary equilibria, I offer a straightforward way to determine the number of time periods of the former that may form a unit of time of the latter. In this way, I show that the theoretical length of a generation is an increasing function of the discount factor of the optimizing agent and I provide an economic rationale for such a relationship grounded on consumption smoothing.

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