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On the relationship between fiscal multipliers and population aging in Japan: Theory and empirics

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  • Morita, Hiroshi

Abstract

Recent literature has pointed out that the effect of fiscal policy possibly depends on the aging structure. This paper contributes to the literature by approaching this issue from both empirical and theoretical perspectives. We first examine how population aging affects the efficacy of fiscal stimulus by using panel data from Japan, the world's fastest aging country, and reveal that a government spending shock becomes less effective as the aging rate increases. Then, we construct the theoretical model with heterogeneous agents to replicate our empirical evidence and conduct counterfactual simulation to identify the source of state-dependency. The counterfactual analysis highlights the role of the supply channel through which workers under a liquidity constraint can benefit from increased disposable income induced by a government spending shock. This suggests that promoting labor market participation by elderly people can increase the effectiveness of a government spending shock amid a rapidly aging society.

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  • Morita, Hiroshi, 2022. "On the relationship between fiscal multipliers and population aging in Japan: Theory and empirics," Economic Modelling, Elsevier, vol. 108(C).
    • Handle: RePEc:eee:ecmode:v:108:y:2022:i:c:s0264999322000189
    DOI: 10.1016/j.econmod.2022.105772
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    Cited by:

    1. Puonti, Päivi, 2023. "Effective Fiscal Policy in an Aging Economy: Evidence from a BVAR Analysis," ETLA Working Papers 110, The Research Institute of the Finnish Economy.

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    More about this item

    Keywords

    Population aging; Fiscal multipliers; Hierarchical panel VAR model; New Keynesian model;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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