Transaction Costs in an Overlapping Generations Model

Abstract

We study the stability properties of a Diamond (1965) overlapping generations model in which agents have to pay transaction costs related to the capital accumulated. In particular, these costs depend positively on the amount of individuals savings. At first, we show that under standard conditions, the feasible path may be dynamically inefficient (efficient) if there is an over-accumulation (under-accumulation) of capital with respect to Golden Rule. Namely, the introduction of transaction costs reduces the Golden Rule level of saving comparing to the standard model. It is also shown that the stationary equilibrium is determinate. Further, transaction costs promote the emergence of cycles of period two and therefore acts as a destabilizing factor. The analytical findings are completed by a numerical example.