Monetary and Fiscal Policy when People have Finite Lives

Roger Farmer and Pawel Zabczyk

No 13432, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The theoretical models that underpin macroeconomic policy analysis typically consist of one or more sets of interacting infinite-horizon agents. In the absence of frictions of any kind and in the presence of commonly maintained simplifying assumptions, these models possess a unique rational expectations equilibrium which is determined by economic fundamentals. This property is critical if comparative statics are to be useful to explain how a given intervention will influence economic outcomes. This paper demonstrates that the uniqueness property does not carry over to economic models with more realistic population demographics. We construct a 62-generation overlapping generations model with production where agents have a hump-shaped labor endowment calibrated to U.S. data and we show that, in our model, both nominal and relative prices are indeterminate.

Keywords: Ftpl; Indeterminacy; Olg model; Monetary policy; Monetary and fiscal policy (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 H62 (search for similar items in EconPapers)
Date: 2022-01
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Working Paper: Monetary and Fiscal Policy When People Have Finite Lives (2019)
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