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Research Associate Federal Reserve Bank of Dallas

By Finn E. Kydland and D’ann M. Petersen

Abstract

In this article, we outline a general framework appropriate for addressing most quantitative macroeconomic issues.…The research we highlight examines an aging population’s impact on savings and/or interest rates and the quantitative impact of immigration policy on savings rates and fiscal policy. One does not have to look far to notice that, in the real world, people are different. Individuals are of different ages and may have different attributes, such as varying educational achievements or on-the-job skills. There are many real-world examples of why individual differences may matter for economic policy. Some of these examples are related to demographic issues, such as how a population that is getting proportionally older will influence future savings and interest rates or increase the possibility of higher tax burdens for future workers. (See Figure 1 for an illustration of how the population distribution is expected to change.) Another example in which individual differences matter is the question of immigration’s impact on society and whether immigrants will reduce the need for higher taxes or increase the burden on the government. Economists have long conjectured that the best answers to such questions come from models that are inhabited by people—because people make decisions that have implications for the actual economy. Only recently have economists been able to compute the outcomes of models with large numbers of individuals at every stage of the life cycle. Before the 1990s and high-speed computers, solving such models was computationally infeasible. Nevertheless, from life-cycle differences and still get reliable answers to many macroeconomic questions, especially those relating to growth and business cycles. In this article, we outline a general framework appropriate for addressing most quantitative macroeconomic issues. This approac

Year: 2011
OAI identifier: oai:CiteSeerX.psu:10.1.1.197.8966
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