Essays on demographic changes and macroeconomics

This thesis uses multi-period overlapping generations models (OLG) to analyse the impacts of demographic changes on the macroeconomy and financial markets. It contributes to the OLG literature in three aspects: the implementation of age-dependent risk aversion to study the role of precautionary savings, a new approach of welfare evaluation of fiscal policy reforms that incorporates the effect of policy-induced uncertainties, and a new framework that endogenises rates of return for risk-free bond and risky capital in a production economy. The first essay uses an OLG model with risk-sensitive preferences to examine the role of age-dependent risk aversion in determining life-cycle behaviour, transition dynamics of macroeconomic variables, and the welfare impacts of population ageing. Under the population ageing assumption, the results emphasise the role of precautionary saving motives that shape the lifetime consumption-saving plan and alter the interactions via the effects of cohort re-weighting and life-cycle redistribution. This leads to different transition dynamics of macroeconomic variables. Risk-sensitive preferences also allow households to internalise changes in future uncertainties when evaluating their welfare impacts, introducing new criteria to policymakers when evaluating policy alternatives. The second essay revisits optimal fiscal policies in response to population ageing. Using the refined version of the framework developed in the first essay, the policy evaluation factors in the welfare cost of policy-induced uncertainties. The results suggest that, based on the welfare of future generations, financing population ageing by either reducing social security benefits or extending the retirement age may not be as strongly preferred to raising the payroll tax rate as prior studies have suggested. The third essay provides a framework to endogenise the rates of return for risk-free bonds and risky capital in an OLG model. The rate of return on capital is endogenised by introducing idiosyncratic production shocks which allows the model to be solved using the traditional numerical method while still enables the interaction between financial markets and macroeconomic conditions in a production economy. The paper finds that several factors such as borrowing costs, labour income and production risk play essential roles in life-cycle portfolios. The paper then investigates the impacts of population ageing on macroeconomic conditions, life-cycle behaviours and financial market structures. The results show that population ageing leads to higher capital-labour ratios and reduces the rates of return on both assets. The bond market shrinks significantly, and capital decreases if the fertility rate declines but increases if the mortality rate declines, leading to structural change in financial markets