Population ageing in a small open economy – some policy experiments with a tractable general equilibrium model
AbstractThis paper extends Gertler’s (1999) tractable overlapping generations model with life-cycle features by allowing for distortionary taxation, demographic transition and stochastic variation in demographic structure. The model is then used to study demographic change in the small open economy of Finland. Simulations highlight the key role played by labour market responses to ageing. When the responses of labour supply, wages, and hence private consumption, to higher taxation are consistently accounted for, population ageing has clearly much larger effects on public finance, when compared to mechanical sustainability calculations. Stochastic simulations suggest that lengthening of working time has only a modest alleviating effect on the fiscal burden of ageing. This is due to the fact that stochastic variation in the length of working time has only a relatively small effect on the model’s dependency ratio. Variation in life expectancy is clearly much more important.
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Bibliographic InfoPaper provided by Bank of Finland in its series Research Discussion Papers with number 28/2006.
Length: 45 pages
Date of creation: 23 Dec 2006
Date of revision:
ageing; general equilibrium; public finance; demographic uncertainty;
Find related papers by JEL classification:
- E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
- H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
- J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
- J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-01-28 (All new papers)
- NEP-DGE-2007-01-28 (Dynamic General Equilibrium)
- NEP-MAC-2007-01-28 (Macroeconomics)
- NEP-PBE-2007-01-28 (Public Economics)
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