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

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.