DP13432 Monetary and Fiscal Policy when People have Finite Lives
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.
