Fiscal and Monetary Responses to the Demographic Change in Germany

The analysis compares the Fiscal Theory of the Price Level with public bond purchases by the central bank in face of the demographic development in Germany. In order to account for both the diminishing population growth and an aging society, a heterogeneous agent model in a life- cycle economy is applied. When the demographic trends projected for 2025 to 2080 are fed into the model, the application of the FTPL shows rising sovereign debt, higher tax income as well as higher precautionary savings after the year 2030. Total output and inflation remain largely unaffected. When Quantitative Easing programs are evaluated, the estimation yields dynamics that are considerably below the long run values for most of the macroeconomic aggregates. Output drops from 2025 on and inflation is subdued. JEL Codes: C630, E52, E62, J110