The subject of the analysis is the impact of the demographic development in Germany on inflation with varying monetary as well as fiscal policy reactions. In order to account for both the diminishing population growth and an aging society, a heterogeneous agent model in a life-cycle economy is employed. Monetary policy is selected either by the response only to inflation or to both inflation and output in the Taylor Rule. In the fiscal policy sphere, a debt stabilizing tax rule is compared to an additional countercyclical response and to adherence to the Fiscal Theory of the Price Level (FTPL). Critical policy parameters are estimated from 1951 to 2019 using Bayesian estimation techniques. When data on the demographic trends from 2020 until 2080 are fed into the models for forecasting, both workers and retirees increase their saving efforts. Apart from the dynamics in the FTPL, it is entered a period of persistent inflation above target until around the year 2060, elevated real interest rate and real public debt. The model of the policy rule without the reaction to the output gap results in the highest paths of real output and inflation. In the model which incorporates the FTPL, the response is more subdued for the majority of macroeconomic aggregates after the initial fiscal adjustment.
JEL Codes: C630, E52, E62, J110