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The Dynamics of the Age Structure, Dependency, and Consumption

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Abstract

We examine the dynamic interaction of the population age structure, economic dependency, and fertility, paying particular attention to the role of intergenerational transfers. In the short run, a reduction in fertility produces a %u201Cdemographic dividend%u201D that allows for higher consumption. In the long run, however, higher old-age dependency can more than offset this effect. To analyze these dynamics we develop a highly tractable continuous-time overlapping generations model in which population is divided into three groups (young, working age, and old) and transitions between groups take place in a probabilistic fashion. We show that most highly developed countries have fertility below the rate that maximizes steady state consumption. Further, the dependency-minimizing response to increased longevity is to raise fertility. In the face of the high taxes required to support transfers to a growing aged population, we demonstrate that the actual response of fertility will likely be exactly the opposite, leading to increased population aging.

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Paper provided by Brown University, Department of Economics in its series Working Papers with number 2006-08.

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Date of creation: 2006
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Handle: RePEc:bro:econwp:2006-08

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Postal: Department of Economics, Brown University, Providence, RI 02912

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Cited by:
  1. Strittmatter, Anthony & Sunde, Uwe, 2011. "Health and Economic Development: Evidence from the Introduction of Public Health Care," IZA Discussion Papers 5901, Institute for the Study of Labor (IZA).
  2. Liviano Solís, Daniel & Arauzo Carod, Josep Maria, 2013. "Spatial Exploration of Age Distribution in Catalan Municipalities," Working Papers, Universitat Rovira i Virgili, Department of Economics 2072/220222, Universitat Rovira i Virgili, Department of Economics.
  3. Renuga Nagarajan & Aurora A.C. Teixeira & Sandra T. Silva, 2013. "The impact of population ageing on economic growth: an in-depth bibliometric analysis," FEP Working Papers, Universidade do Porto, Faculdade de Economia do Porto 505, Universidade do Porto, Faculdade de Economia do Porto.
  4. Anikó Bíró, 2013. "Subjective mortality hazard shocks and the adjustment of consumption expenditures," Journal of Population Economics, Springer, Springer, vol. 26(4), pages 1379-1408, October.
  5. David N. Weil, 2006. "Population Ageing," Working Papers id:506, eSocialSciences.
  6. Narciso, Alexandre, 2010. "The impact of population ageing on international capital flows," MPRA Paper 26457, University Library of Munich, Germany.
  7. Renuga Nagarajan & Aurora A.C. Teixeira & Sandra T. Silva, 2013. "The impact of an ageing population on economic growth: an exploratory review of the main mechanisms," FEP Working Papers, Universidade do Porto, Faculdade de Economia do Porto 504, Universidade do Porto, Faculdade de Economia do Porto.

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