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Monetary and Fiscal Policy When People Have Finite Lives

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  • Roger E.A. Farmer
  • Pawel Zabczyk
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.

Suggested Citation

  • Roger E.A. Farmer & Pawel Zabczyk, 2019. "Monetary and Fiscal Policy When People Have Finite Lives," NBER Working Papers 25445, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:25445
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    Cited by:

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    2. Gancho Ganchev & Ivan Todorov, 2021. "Taxation, government spending and economic growth: The case of Bulgaria," Journal of Tax Reform, Graduate School of Economics and Management, Ural Federal University, vol. 7(3), pages 255-266.
    3. Farmer, Roger, 2019. "The Indeterminacy School in Macroeconomics," CEPR Discussion Papers 13745, C.E.P.R. Discussion Papers.
    4. Czeczeli, Vivien, 2023. "Az államadósság fenntarthatósága alacsony kamatkörnyezetben [The sustainability of public debt in a low interest rate environment]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(12), pages 1361-1388.
    5. Phil Armstrong, 2020. "Can Heterodox Economics Make a Difference?," Books, Edward Elgar Publishing, number 19964.
    6. Anshuman Kamila, 2022. "Fiscal dominance in India: an empirical estimation," Indian Economic Review, Springer, vol. 57(1), pages 113-132, June.
    7. Lidiema, Caspah, 2024. "Monetary-fiscal policy interdependence and pricing dynamics: Empirical estimation of fiscal dominance in Kenya," KBA Centre for Research on Financial Markets and Policy Working Paper Series 83, Kenya Bankers Association (KBA).
    8. Kamila, Anshuman, 2021. "Fiscal dominance in India: An empirical estimation," Working Papers 21/359, National Institute of Public Finance and Policy.
    9. Anshuman Kamila, 2021. "Fiscal dominance in India: Through the windshield and the rearview mirror," IEG Working Papers 429, Institute of Economic Growth.
    10. Roger E A Farmer, 2019. "The Indeterminacy Agenda in Macroeconomics," National Institute of Economic and Social Research (NIESR) Discussion Papers 507, National Institute of Economic and Social Research.

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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