Life-Cycles, Dynasties, Saving: Implications for Closed and Small, Open Economies

Abstract

This paper examines the macroeconomic implications of life-cycle and dynastic saving behavior for closed and small, open economies. Using an extended version of Blanchard`s overlapping agents model, the analytical framework nests these two competing views, treating agents as either dynastic households or disconnected generations. Calibrating the life-cycle variant using empirical age-earnings profiles, the analysis compares the long-run effects of fiscal policy shocks under both perspectives. The results quantify the implications of life-cycle considerations for the effects of deficit finance on real interest rates and the capital stock or net foreign assets.

Keywords: Ricardian Equivalence, Government Debt, Saving

JEL Classification: E21, E27, E62, H31