Death and the Keynesian multiplier

Abstract

The Blanchard-Yaari continuous-time model of overlapping generations is applied to a monetary economy with Keynesian unemployment. It is shown that a positive probability of death increases the short- and long-run multipliers of government spending on output. In the first example this is due to the government deficit being bond-financed, plus the failure of Ricardian equivalence which death implies. In the second, where the government budget remains balanced, it is due to the private accumulation of capital, which has a wealth effect on consumption. However, in the absence of death, this is negated by the higher lifetime tax burden.