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Oxford Economic Papers Advance Access originally published online on May 12, 2007
Oxford Economic Papers 2008 60(1):88-121; doi:10.1093/oep/gpm009
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Right arrow D91 - Intertemporal Consumer Choice; Life Cycle Models and Saving
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© Oxford University Press 2007 All rights reserved

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

Ben J. Heijdra* and Ward E. Romp{dagger}

*University of Groningen, Faculty of Economics, P.O. Box 800, 9700 AV Groningen, The Netherlands; e-mail: b.j.heijdra{at}rug.nl
{dagger}University of Groningen, Faculty of Economics, e-mail: w.e.romp{at}rug.nl

JEL classifications:: E10, D91, F41, J11


  Abstract

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.


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