Working Paper: NBER ID: w25445
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: Fiscal Policy; Monetary Policy; Overlapping Generations; Indeterminacy
JEL Codes: E31; E58; H62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal policy active + Monetary policy active (E63) | Indeterminate equilibria (D59) |
| Intertemporal elasticity of substitution (IES) (D15) | Multiple balanced steady states (C62) |
| Three-generation model with humpshaped endowment profile (D15) | Multiple equilibria (D59) |
| Established results from representative agent model (E13) | Does not hold in overlapping generations model (D15) |
| Golden rule equilibrium (interest rate = growth rate) (E43) | Indeterminate when both policies active (E63) |