The model describes the behaviour of consumers, which are heterogeneous in terms of age, income and ¯nancial assets. They maximize the utility from consumption sub- ject to the life-cycle budget constraint. Their savings are remunerated at the deposit interest rate and the cost of borrowing is given by the lending rate. When young, con- sumers work and receive wages that depend on an idiosyncratic, stochastic component and a deterministic life-cycle pro¯le of productivity. When old, they are on a manda- tory retirement and receive pensions. The government collects taxes, pension system contributions and accidental bequests, and spends on public consumption, pensions and transfers. Perfectly competitive ¯rms produce homogeneous.
