Implications Of Population Ageing For Long-Term Economic Growth

The article overviews the existing theories and empirical evidence on the consequences of population ageing for economic growth. Demographic changes have a direct impact on all production factors - labour, capital and total factor productivity. Moreover, through their impact on the sustainability of the pension system and public finances, they affect indirectly the long-term potential of the economy, with the latter effect being also considerable and sometimes outweighing the direct costs of ageing. Overlapping generation models (OLG) have been widely used to access the ageing related effects on economic growth, as these models are best suited to account for differences in the lifecycle behavior of the individuals and capture the direct as well as the indirect channels through which changes in the structure and the size of the population affect economic activity and decisions. The article reviews the overlapping generation models, developed by Diamond (1965), Blanchard (1985), and Auerbach and Kotlikoff (1987) and compares how they can be applied to assess the costs of ageing with a view of developing an OLG model for Bulgaria. Several extensions of these seminal models are also discussed.