A life-cycle overlapping-generations model of the small open economy

Abstract

In this paper we construct an overlapping generations model for the small open economy incorporating a realistic description of the mortality process. With age-dependent mortality, the typical life-cycle pattern of consumption and saving results from the maximizing behaviour of individual households. Our "Blanchard-Yaari-Modigliani" model is used to analytically study a number of typical shocks affecting the small open economy, namely a balanced-budget public spending shock, a temporary Ricardian tax cut, and an interest rate shock. The demographic details matter a lot-both the impulse-response functions and the welfare profiles (associated with the different shocks) are critically affected by them. These demographic details furthermore do not wash out in the aggregate. The model is flexible and can be applied to a wide variety of theoretical and policy issues.JEL codes: E10, D91, F41, J11.

Human capital formation and macroeconomic performance in an ageing small open economy

“…Equation (18) shows the population share of the v-cohort at some later time t. It generalizes the corresponding expression found in Heijdra and Romp (2008a) to the case of a nonconstant population growth rate, n (t). Equation (19) implicitly determines n (t) for given demographic parameters (see also Section 3.1).…”

“…In our earlier paper (Heijdra and Romp, 2008a) we established a number of properties of the ∆ (u, λ) function, which we restate for convenience in Proposition 1.…”

“…We allow for non-zero population growth by employing the analytical framework that was initially developed by Buiter (1988) and was extended to an age-dependent mortality rate by Heijdra and Romp (2008a). Since we wish to study ageing shocks below, we generalize our earlier model by assuming that different cohorts may face different mortality profiles.…”

“…Our analysis makes use of modeling insights from two main bodies of literature. First, in order to allow for demographic shocks, we employ the generalized Blanchard-Yaari overlapping-generations model reported in our earlier paper (Heijdra and Romp, 2008a). In this model disconnected generations are born at each instant and individual agents face a positive and age-dependent probability of death at each moment in time.…”

Keeping up with the ageing Joneses

“…7 In the context of tax and environmental policy see, for example, Bovenberg and Heijdra (1998). Representative applications of the BY framework in the open economy context include Frenkel andRazin (1986), Buiter (1987), Obstfeld and Rogoff (1995), and Heijdra and Romp (2008). 8 As in Heijdra and Ligthart (2006) and Bettendorf and Heijdra (2006), the demographic disturbances modeled in this paper are time-dependent, but cohort independent.…”