Debt, Deficits and Finite Horizons: The Stochastic Case

We introduce a solution technique for the study of discrete time stochastic models populated by long-lived agents. We introduce aggregate uncertainty and complete markets into a 'perpetual-youth' model of a kind first studied by Olivier Blanchard and we show that the pure-trade version of the model behaves much like the two-period overlapping generations model. Our methods are easily generalized to economies with production and they should prove useful to researchers who seek a tractable stochastic model in which fiscal policy has real effects on aggregate allocations.