An overlapping generations equilibrium, like any equilibrium, may be disturbed by an unanticipated change in the economic environment, for example, a change in preferences. If the equilibrium is nonstationary, however, the change may occur in a region of the commodity space which the equilibrium allocation path will not enter until several periods into the future. Nonetheless, because of the intertemporal equilibrium conditions, the environmental change may require an adjustment in present prices and allocations. Since the present equilibrium allocation is not in the region where preferences have changed, the need for the present price and allocation adjustment will not be signaled to the market until too late.
All Science Journal Classification (ASJC) codes
- Economics and Econometrics