Indeterminacy, intergenerational redistribution, endogenous longevity and human capital accumulation

Paper number: 04/01

Paper date: October 26, 2004

Year: 2004

Paper Category: Working Paper

Authors

Giam Pietro Cipriani and Miltiadis Makris

Abstract

This paper sets up an OLG economy with endogenous life expectancy to study how fiscal policy that redistributes between generations can open the door to sunspot equilibria. Agents invest independently in their own human capital, produce and consume output, and receive a pension upon retirement. The model produces an expectations coordination problem that can explain significant differences in growth paths followed by otherwise identical countries. In particular, we show that our economy may be characterised by local indeterminacy of dynamic equilibria, and hence feature fluctuations which are driven by extrinsic uncertainty.

Indeterminacy, intergenerational redistribution, endogenous longevity and human capital accumulation Indeterminacy, intergenerational redistribution, endogenous longevity and human capital accumulation