Word Count : 987

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An increase in the interest rate in an overlapping generations (OLG) framework where individuals work when young (period t) and live off interest income when old (period t+1) changes the intertemporal trade–off facing each agent and thereby affects consumption in period t through two opposing channels: the substitution effect and the income effect. Which channel dominates depends on preferences (in particular the intertemporal elasticity of substitution), the initial position of the individual (net saver or borrower), and whether the analysis is partial–equilibrium (r exogenous) or general–equilibrium (r determined by capital market conditions that also change wages). To set up the standard individual problem, let a representative young agent in period t receive wage income $w_t$. She chooses consumption when young $c_t$ and saving $s$ to maximize lifetime utility $$ U = u(c_t) + \beta u(c_{t+1}), $$ subject to the budget constraints $$ c_t + s = w_t,\qquad c_{t+1} = (1+r)\,s, $$ where $r$ is the interest rate between t and t+1 and $\beta$ is _____ _______ ______ ________ ________ __________.
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