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The present paper develops a general equilibrium model with overlapping generations and endogenous fertility in order to analyze the interaction between public policy and household labor supply and fertility decisions. The model's benchmark equilibrium reflects the current family policy as well as the differential fertility pattern of educational groups in Germany. Then we simulate alternative reforms of child benefits and family taxation that increase the long-run fertility and growth rate of the economy. Our simulations indicate two central results: First, although households are typically hurt by the first-order effects of family policy, it is possible to generate long-run welfare gains due to positive second-order effects from induced changes in the population structure. Second, specific family policies could be designed that yield a joint increase of the fertility rate and female employment rate as observed in cross-country studies.
stochastic fertility, general equilibrium life cycle model