Discussion Paper Series 2007-E-4

A Dynamic New Keynesian Life-Cycle Model:Societal Ageing, Demographics and Monetary Policy

Ippei Fujiwara, Yuki Teranishi

In this paper, we first construct a dynamic new Keynesian model that incorporates life-cycle behavior a la Gertler (1999), in order to study whether structural shocks to the economy have asymmetric effects on heterogeneous agents, namely workers and retirees. We also examine whether considerations of life-cycle and demographic structure alter the dynamic properties of the monetary business cycle model, specifically the degree of amplification in impulse responses. According to our simulation results, shocks indeed have asymmetric impacts on different households and the demographic structure does alter the size of responses against shocks by changing the degree of the trade-off between substitution and income effects.

Keywords: Heterogenous Agents; Life-Cycle; New Keynesian Model

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

Copyright © 2007 Bank of Japan All Rights Reserved.

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