Working Paper: CEPR ID: DP13432
Authors: 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.
Keywords: FTPL; Indeterminacy; OLG Model; Monetary Policy; Monetary and Fiscal Policy
JEL Codes: E31; E52; E58; H62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary shocks (E39) | Real quantities (C29) |
| Fiscal policy (E62) | Price level (E30) |
| Fiscal policy (E62) | Real interest rates (E43) |
| Age-income profile (J26) | Emergence of multiple equilibria (D59) |
| Monetary and fiscal policies active (E63) | Robust identification strategy (C51) |
| OLG model (C67) | Real interest rate determination (E43) |
| OLG model (C67) | Initial price level determination (E30) |