February 12, 2004

Saving for Retirement

Retirement is a fundamental motivation for saving. We considered this by adding a production possibility frontier to our intertemporal substitution diagram.

The most important point of the discussion is that access to financial markets makes the agent better off. This explains the existence of financial markets.

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The diagram also shows how taxing interest income causes people to work less when they are young. Conversely, cutting the tax rate on interest income would cause people to work more when they are young.

The production possibility frontier does not take on the shape below because there is an interaction between the amount you work when you are young and the amount you can work when you are old.

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The agent can have any point on a budget constraint if he can get to some point on that budget constraint. Given a production possibility frontier, the agent solves the problem of getting to the best possible budget constraint.

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Posted by bparke at February 12, 2004 11:13 AM