DP13432 Monetary and Fiscal Policy when People have Finite Lives
This paper incorporates realistic demographic structure into macroeconomic policy analysis by examining an overlapping generations model calibrated to match U.S. income data over the lifecycle. We provide explicit conditions for the existence of multiple dynamically efficient steady-state equilibria with positive debt levels for empirically relevant calibrations. Unlike representative agent frameworks, indeterminacy arises even with active monetary and fiscal policies. Following fundamental shocks, the model generates highly persistent swings in real interest rates consistent with evidence on long-horizon trends. Our tractable approach bridges theoretical models relying on infinite horizons and homogeneous agents with finite-lived heterogeneous consumers that populate actual economies.
