Indeterminacy, intergenerational redistribution, endogenous longevity and human capital accumulation
Paper number: 04/01
Paper date: October 26, 2004
Paper Category: Working Paper
Giam Pietro Cipriani and Miltiadis Makris
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.